Question

Professional Properties is considering remodeling the office building it leases to Heartland Insurance. The remodeling costs are estimated at $2.8 million. If the building is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in rent for the next five years. The discount rate is 12.5 percent. What is the benefit of the remodeling project to Professional Properties?

Answer 1

Answer:

$119,666

Explanation:

The benefit of remodelling can be calculated using the net present value.

The net present value is the present value of after tax cash flows minus the cost of an investment.

The net present value can be calculated using a financial calculator.

Cash flow for year 0 =  $-2.8 million

Cash flow each year from year one to year five = $820,000

I = 12.5%

NPV = $119,666

The benefit of the renovation exceeds its cost so the renovation should be carried out.

I hope my answer helps you.