A commercial property is available for a price of £25.5 million and a developer is interested in purchasing it in order to turn it into a rental property. The developer estimates that the total refurbishments costs will amount to £3.1 million, which will be incurred exactly three months after purchase. A potential tenant company has agreed to occupy and rent out the property six months after the date of purchase. The lease agreement states that the company will rent the office block for 15 years and will then purchase the property at the end of the rental period for £28 million. It is further agreed that rents will be paid quarterly in arrears and will be increased every 3 years at the rate of 3.5% per annum compound. The initial rent has been set at £2.7 million per annum with the first rental payment is due exactly three months following the date of occupation. Calculate the net present value of the profit from this investment assuming that the developer earns a rate of return of 9% per annum effective.
A commercial property is available for a price of £25.5 million and a developer is interested in purchasing it in order to turn it into a rental property. The developer estimates that the total refurbishments costs will amount to £3.1 million, which will be incurred exactly three months after purchase. A potential tenant company has agreed to occupy and rent out the property six months after the date of purchase. The lease agreement states that the company will rent the office block for 15 years and will then purchase the property at the end of the rental period for £28 million. It is further agreed that rents will be paid quarterly in arrears and will be increased every 3 years at the rate of 3.5% per annum compound. The initial rent has been set at £2.7 million per annum with the first rental payment is due exactly three months following the date of occupation. Calculate the net present value of the profit from this investment assuming that the developer earns a rate of return of 9% per annum effective.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
100%
calculate using formulas, no tables:
correct answer:
NPV(9%) = 32.75103 - 28.53393 = 4.217107
Transcribed Image Text:A commercial property is available for a price of £25.5 million and a developer is interested
in purchasing it in order to turn it into a rental property. The developer estimates that the total
refurbishments costs will amount to £3.1 million, which will be incurred exactly three months
after purchase.
A potential tenant company has agreed to occupy and rent out the property six months after
the date of purchase. The lease agreement states that the company will rent the office block
for 15 years and will then purchase the property at the end of the rental period for £28
million. It is further agreed that rents will be paid quarterly in arrears and will be increased
every 3 years at the rate of 3.5% per annum compound. The initial rent has been set at £2.7
million per annum with the first rental payment is due exactly three months following the date
of occupation.
Calculate the net present value of the profit from this investment assuming that the
developer earns a rate of return of 9% per annum effective.
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