Question

Top Shelf Industries is considering remodeling a building that it leases to a retail store. The remodeling costs are estimated at $2.15 million. If it proceeds with the remodeling, the tenant has agreed to pay an additional $750,000 a year in rent for the next 4 years. The discount rate is 13 percent. What is the benefit of the remodeling project to Top Shelf Industries

Answer 1

$80,875

Step-by-step explanation:

The computation of the net present value or net benefit is shown below:

= Present value of all yearly cash inflows after applying discount factor - initial investment

where,

The Present value would be

= Additional amount × PVIFA for 4 years at 13%

= $750,000 × 2.9745

= $2,230,875

Refer to the PVIFA table

And, the initial investment is $2,150,000

Now put these values to the above formula

So, the value would equal to

= $2,230,875 - $2,150,000

= $80,875