Professional Properties is considering remodeling the office building it leases to Heartland Insurance. The remodeling costs are estimated a

Professional Properties is considering remodeling the office building it leases to Heartland Insurance. The remodeling costs are estimated at $3.4 million. If the building is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in rent for the next 5 years. The discount rate is 15 percent. What is the benefit of the remodeling project to Professional Properties? A) -$651,233 B) -$489,072 C) $5,214 D) $128,399 E) $311,417

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  1. Answer:

    A) -$651,233

    Explanation:

    The computation of the benefit generated of the remodelling project is shown below:

    If we considered the discounted rate i.e. 15% for 5 years of $820,000 so its present value would be $2,748,767 ($820,000 × 3.3521)

    And, the predicted cost is $3,400,000

    So here the cost is there instead of the benefit of

    = $2,748,767 – $3,400,000

    = -$651,233

    Hence, the correct option is A

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