Intermediate Microeconomics and Its Application 12th Edition by Walter Nicholson,Christopher Snyder

Exercise 28

CEO Blowhard continues his economic wisdom by discussing his rationale for calculating the present value of the rents he might save by purchasing a building to house his firm: ''We could save $25,000 per year in rent by purchasing our own building. Over a 25-year horizon, Nicholson and Snyder's Table (see Appendix to Chapter 14) tells me that the present value of these savings is about $350,000 using a real interest rate of 5 percent. But that is clearly an understatement since our rents are bound to rise because of general inflation. Hence, I'm sure it would be worthwhile for us to purchase a building costing up to at least $500,000.'' Has the CEO got it right now? How should he take into account the expected inflationary increases in rent in the future?
Table Present Value of $1 per Year for Various Time Periods and Interest Rates