An investor just purchased an office building for $100,000. He knows for certain that he can sell the building for $110,000 in five years. Approximately how much does he need to charge in annual rent in order to achieve a 15% annual return on the deal (rounded to the nearest hundred dollars)?

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AyAyCapitan AyAyCapitan · Answer 1 · 2019-07-10T02:19:27+02:00

Answer:

$13,000 per year

Explanation:

The annual return on the deal will needs to be 15%

the return would be:

[tex]\frac{Gain On Sale + 5YearsRent}{Adquisition Value} = $Return On Investment[/tex]

Because we are asked to fullfil an annual rate and this is a 5 years project:

the return would be 0.15 * 5 years

Now posting the know values on the formula

[tex]\frac{10,000 + Rent }{100,000} = 0.15 * 5[/tex]

We have to sovle for the rent

So 10,000 + 5YearsRent = 0.15*5*100,000

5YearsRent = 75,000 - 10,000

5YearsRent = 65,000

Now we have to divide by 5 year, because that would be the return for 5 years.

Rent = $65,000/5 years = $13,000 per year