A building is appraised at $1 million. This estimate is based on forecasted net rent of $100,000 per year discounted at a 10 percent cost of capital [PV = 100,000/ 0.1 = 1,000,000]. The rent is the net of repair and maintenance costs and taxes. Suppose the building is currently uninhabitable. It will take one year and $250,000 of work (spent at the end of the year)to bring it into rentable condition. How much would you be willing to pay for the building today?
A)$1,000,000
B)$681,818
C)$750,000
D)$909,090

Question

Quizplus · Accepted Answer

To calculate the current value of the building, we need to adjust the PV of the forecasted rent with the cost of the repairs.

PV of rent = $100,000 / 0.1 = $1,000,000 
Cost of repairs = $250,000

Adjusted value = PV of rent - cost of repairs = $1,000,000 - $250,000 = $750,000

Therefore, you would be willing to pay $750,000 for the building today.

Option A is incorrect because it does not take into account the cost of repairs. 
Option C is incorrect because it is the original appraised value based on forecasted rent without adjusting for the cost of repairs. 
Option D is incorrect because it does not take into account the cost of repairs.

A Building Is Appraised at $1 Million