Your company is negotiating to get a new head office listed for $25,000,000. The owner has proposed the following payment plan for the next 20 years 20% down payment and annual payments of 1.8 million for the next 10 years starting one year from now. For years 11 through 15, the annual payments balloon to $3 million. For years 16 through 20, the annual payments would decline to $400,000.
a. Do you advise your company to accept this offer if the interest rate is 6% for real estate.
b. Determine the break even interest rate for the given payment plan, assuming that the fair value of the office building is equal to its list price.
Can you please use formulas because i dont have the calculator to input. Thanks
The formula you use to find the PV of the stream of payments of $1,800,000, $3,000,000 and $400,000 is this:
PV=P{[1 + R]^N - 1.[1 + R]^-N} R^-1=PV OF $1 PER PERIOD
And also you have to use the following PV formula:
PV=FV[1 + R]^-N=PV OF $1 IN THE FUTURE
Where R=Interest rate per period, N=number of periods, P=periodic payment. PV=Present value, FV=Future value.
