An investor is considering the purchase of a small office building. The NOI is expected to be the following: Year 1, $222,000; Year 2, $232,000; Year 3, $242,000; Year 4, $252,000; Year 5, $262,000. The property will be sold at the end of year 5 and the investor believes that the property value should have appreciated at a rate of 3 percent per year during the five-year period. The investor plans to pay all cash for the property and wants to earn a 10 percent return on investment (IRR) compounded annually. Required: a. What should be the present value of the property today? b. What should be the property value (REV) at the end of year 5 in order for the investor to earn the 10% IRR? c. Based on your answer in (b), if the building could be reproduced for $2,520,000 today, what would be the underlying value of the land? SHOW HOW TO DO IT IN EXCEL.WITH FORMULAS

Principles of Accounting Volume 2
19th Edition
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 10PA: The Ham and Egg Restaurant is considering an investment in a new oven that has a cost of $60,000,...
icon
Related questions
Question
Please correct answer and don't used hand raiting
An investor is considering the purchase of a small office building. The NOI is expected to be the following:
Year 1, $222,000; Year 2, $232,000; Year 3, $242,000; Year 4, $252,000; Year 5, $262,000. The property will
be sold at the end of year 5 and the investor believes that the property value should have appreciated at a
rate of 3 percent per year during the five-year period. The investor plans to pay all cash for the property
and wants to earn a 10 percent return on investment (IRR) compounded annually.
Required:
a. What should be the present value of the property today?
b. What should be the property value (REV) at the end of year 5 in order for the investor to earn the 10%
IRR?
c. Based on your answer in (b), if the building could be reproduced for $2,520,000 today, what would be
the underlying value of the land? SHOW HOW TO DO IT IN EXCEL.WITH FORMULAS
Transcribed Image Text:An investor is considering the purchase of a small office building. The NOI is expected to be the following: Year 1, $222,000; Year 2, $232,000; Year 3, $242,000; Year 4, $252,000; Year 5, $262,000. The property will be sold at the end of year 5 and the investor believes that the property value should have appreciated at a rate of 3 percent per year during the five-year period. The investor plans to pay all cash for the property and wants to earn a 10 percent return on investment (IRR) compounded annually. Required: a. What should be the present value of the property today? b. What should be the property value (REV) at the end of year 5 in order for the investor to earn the 10% IRR? c. Based on your answer in (b), if the building could be reproduced for $2,520,000 today, what would be the underlying value of the land? SHOW HOW TO DO IT IN EXCEL.WITH FORMULAS
Expert Solution
steps

Step by step

Solved in 2 steps with 11 images

Blurred answer
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
Principles of Accounting Volume 2
Principles of Accounting Volume 2
Accounting
ISBN:
9781947172609
Author:
OpenStax
Publisher:
OpenStax College
EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT