Please correct answer and don't use hand rating A developer plans to start construction of a building in one year if at that point rent levelsmake construction feasible. At that time, the building will cost $1,000,000 to construct. Duringthe first year after construction would take place, there is a 60 percent chance that NOI will be$150,000 and a 40 percent chance that the NOI will be $75,000. In either case, NOI would beexpected to increase at 2 percent per year after the first year.Required:What is the value of the land at the end of the year in both possible scenarios?How much should the developer be willing to pay for the land?

Problem Summary:A developer plans to start constructing a building in one year, at which time the…

Answered: A developer plans to start construction…

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 17EA: Gardner Denver Company is considering the purchase of a new piece of factory equipment that will...

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A developer plans to start construction of a building in one year if at that point rent levels make construction feasible. At that time the building will cost $1,340,000 to construct. During the first year after construction would take place, there is a 60 percent chance that NOI will be $175,500 and a 40 percent chance that the NOI will be $88,600. In either case, NOI would be expected to increase at 2 percent per year after the first year. Required: How much should the developer be willing to pay for the land if he wants a 12 percent rate of return? (Round your answer to the nearest whole dollar amount.) Amount payable by developer $ 1,334,444
A developer plans to start construction of a building in two years if, at that point, rent levels make construction feasible. At that time, the building will cost $1,000,000 to construct. During the first year after construction (year 3), there is a 50% chance that NOI will be $150,000 and a 50% chance that the NOI will be $75,000. In either case, NOI would be expected to increase at 4% per year thereafter. What is the value of the real option on the vacant land today if the relevant discount rate is 14%? O 109,649 O 137,369 O 192,367 96,183
Consider an investment in which a developer plans to begin construction, of a building that will cost $2,000,000, in two years if, at that point, rent levels make construction feasible. There is a 40 percent chance that NOI will be $200,000 and a 60 percent chance that NOI will be $80,000 one year after the construction. Assuming 10 percent discount rate and an NOI growth rate of 5 percent, what would the land value be at the completion of the construction, under the real options approach?
Ace Investment Company is considering the purchase of the Apartment Arms project. Next year's NOI and cash flow is expected to be $2,080,000, and based on Ace's economic forecast, market supply and demand and vacancy levels appear to be in balance. As a result, NOI should increase at 4 percent each year for the foreseeable future. Ace believes that it should earn at least a 13 percent return on its investment. Required: a. Assuming the above facts, what would the estimated value for the property be now? b. What going-in cap rates should be indicated from recently sold properties that are comparable to Apartment Arms? c. What would the estimated value for the property, if the required return changes to 12 percent?
Giant Equipment Ltd. is considering two projects to invest next year. Both projects have the samestart-up costs. Project A will produce annual cash flows of $42,000 at the beginning of each year foreight years. Project B will produce cash flows of $48,000 at the end of each year for seven years. Thecompany requires a 12% return.Required:a) Which project should the company select and why? (5 marks)b) Which project should the company select if the interest rate is 14% at the cash flows in Project Bis also at the beginning of each year? (5 marks)
A company is considering a project that will require an initial investment of 600 and additional investments of 100 and 50 at the end of years one and two, respectively. It is expected that revenue from this project will be 150 per year for five years, beginning one year from the initial investment. Assuming an annual effective rate of 15%, calculate the net present value of this project.
A new forklift truck will require an investment of $30,000 and is expected to have year-end MVs and annual expenses as shown in columns 2 and 5, respectively, of the shown Table . If the before-tax MARR is 10% per year, how long should the asset be retained in service? Solve by hand and by spreadsheet. By how much would the MARR have to change before the economic life decreases by one year? How about to increase the economic life by one year?
Ace Investment Company is considering the purchase of the Apartment Arms project. Next year’s NOI and cash flow is expected to be $2,000,000, and based on Ace’s economic forecast, market supply and demand and vacancy levels appear to be in balance. As a result, NOI should increase at 4 percent each year for the foreseeable future. Ace believes that it should earn at leasta 13 percent return on its investment.a. Assuming the above facts, what would the estimated value for the property be now?b. What “going-in” cap rates should be indicated from recently sold properties that are comparable to Apartment Arms?c. Assuming that in part (a) the required return changes to 12 percent, what would the value be now?d. Assume results in part (c). What should the investor now be observing regarding the price of “comparable” sales? What market forces may be accounting for the differences in value between (a) and (c)?
You are considering constructing a luxuryapartment building project that requires an investment of $15,500,000, which comprises $12,000,000for the building and $3,500,000 for land. The building has 50 units. You expect the maintenance cost forthe apartment building to be $350,000 the first yearand $400,000 the second year, after which it will continue to increase by $50,000 in subsequent years. Thecost to hire a manager for the building is estimatedto be $85,000 per year. After five years of operation,the apartment building can be sold for $17,000,000.What is the annual rent per apartment unit that willprovide a return on investment of 15% after tax?Assume that the building will remain fully occupiedduring the five years. Assume also that your tax rateis 35%. The building will be depreciated accordingto 39-year MACRS and will be placed in service inJanuary during the first year of ownership and sold inDecember during the fifth year of ownership.
You are considering a three-year project to build lasers for tattoo removal. The project will require upfront investment of $945,000 for machinery with a forecasted salvage value of $600,000 after three years. Depreciation is straight-line to zero book value over six years. The required rate of return is 10% and the tax rate is 21%. Sales of the tattoo-removing lasers are projected at 80 units per year. In the first year, the price per unit is expected to be $35,000, variable costs are projected at $21,900 per unit, and total fixed costs are anticipated to be $500,000; these will all rise at 2% per year thereafter. What is the project’s NPV?
As a financial analyst, you must evaluate a proposed project to produce printer cartridges. The purchase price of the equipment, including installation, is $65,000, and the equipment will be fully depreciated at t = 0. Annual sales would be 4,000 units at a price of $50 per cartridge, and the project's life would be 3 years. Current assets would increase by $5,000 and payables by $3,000. At the end of 3 years, the equipment could be sold for $10,000. Variable costs would be 70% of sales revenues, fixed costs would be $30,000 per year, the marginal tax rate is 25%, and the corporate WACE is 11%. The firm's project CVs generally range from 1.0 to 1.5. A 3% risk premium is added to the WACC if the initial CV exceeds 1.5, and the WACC is reduced by 0.5% if the CV is 0.75 or less. Then a revised NPV is calculated. What are the revised values for standard deviation, and coefficient of variation? • Standard deviation of NPV = $ • Coefficient of variation of NPV =
As a financial analyst, you must evaluate a proposed project to produce printer cartridges. The purchase price of the equipment, including installation, is $65,000, and the equipment will be fully depreciated at t = 0. Annual sales would be 4,000 units at a price of $50 per cartridge, and the project’s life would be 3 years. Current assets would increase by $5,000 and payables by $3,000. At the end of 3 years, the equipment could be sold for $10,000. Variable costs would be 70% of sales revenues, fixed costs would be $30,000 per year, the marginal tax rate is 25%, and the corporate WACC is 11%. The firm’s project CVs generally range from 1.0 to 1.5. A 3% risk premium is added to the WACC if the initial CV exceeds 1.5, and the WACC is reduced by 0.5% if the CV is 0.75 or less. Then a revised NPV is calculated. What WACC should be used for this project when project risk has been properly considered?

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