A building is appraised at $1 million. This estimate is based on a forecast of net rent of
$100,000 per year discounted at 10% [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 in disrepair and it takes one year and $250,000 to bring it into rent able condition. How much would you be willing to pay for the building today?

Question

Quizplus · Accepted Answer

The cost of repairs should be subtracted from the appraised value to reflect the true value of the building in its current condition. Therefore, the new net present value of the building would be calculated as follows: PV = (100,000 - 250,000)/0.1 = 750,000. This means that the building is actually worth $750,000 in its current state, and you should only be willing to pay that amount or less to account for the necessary repairs. Choice B is the closest option to this amount.

A Building Is Appraised at $1 Million