You are contemplating the purchase of an office building. Next year 
            net rental income will be $400,000, which will grow at 4% per year. 
            You believe that in 10 years the office building could be sold for 
            $7.4 million. The appropriate discount rate for investments of this 
            type is 12%. What is the most you should be willing to pay for the 
            office building today?

Fatima1102 ?

This is a straightforward net-present value problem, discounting cash
flows for the cost of money each year:

Investopedia.com
?Net Present Value -- NPV? (undated)
http://www.investopedia.com/terms/n/npv.asp

It?s common in these computations to set up each year?s NPV factor,
then multiply cash flows times them.  There?s an assumption here that
all cash flows are coming at year-end, done to simplify the
calculations (though they work with a half-year assumption and
slightly different numbers):

Year 1: 1/1.12 = 0.8929
Year 2: 1/(1.12)^2 = 0.7972
Year 3: 1/(1.12)^3 = 0.7118
.
.
.
Year 10: 1/(1.12)^10 = 0.3220

You can now discount everything ? from the annual rents to your final
sale price ? back to an NPV by multiplying it.  I?ve set it all up in
a spreadsheet here:
http://www.mooneyevents.com/rental.xls

Your total NPV is $4,999,607 ? so you?d pay any amount up to that level.

Best regards,

Omnivorous-GA