Kymani Swanson

Business

20 October, 16:55

An investor is considering the purchase of an existing suburban office building approximately five years old. The building, when constructed, was estimated to have an economic life of 50 years, and the building-to-value ratio was 80 percent. Based on current cost estimates, the structure would cost $5 million to reproduce today. The building is expected to continue to wear out evenly over the 50-year period of its economic life. Estimates of other economic costs associated with the improvement are as follows: Repairable physical depreciation: $300,000 to repair. Functional obsolescence (repairable) : $200,000 to repair. Functional obsolescence (nonrepairable) : $25,000 per year rent loss. The land value has been established at $1 million by comparable sales in the area. The investor believes that an appropriate opportunity cost for any deferred outlays or costs should be 12 percent per year.