An office block is available for a price of £42 million and a developer is interested in purchasing it in order to turn it into a rental property. The developer estimates that the refurbishment costs will be incurred continuously during the first four months after purchase at a rate of £5.5 million per annum. A potential tenant company has agreed to occupy and rent out the property exactly half a year after the date of purchase. The lease agreement states that the company will rent the office block for 20 years and will then purchase the property at the end of the rental period for a final payment of £10 million. It is further agreed that rent will be paid quarterly in arrears and will be increased every 4 years at the rate of 3% per annum compound. The initial rent has been set at £3.8 million per annum with the first rental payment due exactly three months after the date of occupation. (i) The developer was able to finance this investment from a loan at a borrowing rate of 7% per annum effective. Calculate the net present value of the profit from this investment at the rate of borrowing. (ii) Show that the discounted payback period of this investment falls within the 18th year of the rental contract.
An office block is available for a price of £42 million and a developer is interested in purchasing it in order to turn it into a rental property. The developer estimates that the refurbishment costs will be incurred continuously during the first four months after purchase at a rate of £5.5 million per annum. A potential tenant company has agreed to occupy and rent out the property exactly half a year after the date of purchase. The lease agreement states that the company will rent the office block for 20 years and will then purchase the property at the end of the rental period for a final payment of £10 million. It is further agreed that rent will be paid quarterly in arrears and will be increased every 4 years at the rate of 3% per annum compound. The initial rent has been set at £3.8 million per annum with the first rental payment due exactly three months after the date of occupation. (i) The developer was able to finance this investment from a loan at a borrowing rate of 7% per annum effective. Calculate the net present value of the profit from this investment at the rate of borrowing. (ii) Show that the discounted payback period of this investment falls within the 18th year of the rental contract.
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
Solve it Using formulas, no tables
Correct answers:
i) NPV(7%)= PV(l) + PV(s) - PV(c) = 48.15757 + 2.4982 - 2.4982 = 6.843
ii) we need to show that PV(l)(17) < PV(c) and PV(l)(18) > PV(c)
PV(l)(16)= 41.2188 < 43.8128 --> PV(l)(17) = 43.1333 < 43.8128
--> PV(l)(18) = 44.92254 > 43.8128
Transcribed Image Text:An office block is available for a price of £42 million and a developer is interested in
purchasing it in order to turn it into a rental property. The developer estimates that the
refurbishment costs will be incurred continuously during the first four months after purchase
at a rate of £5.5 million per annum.
A potential tenant company has agreed to occupy and rent out the property exactly half a
year after the date of purchase. The lease agreement states that the company will rent the
office block for 20 years and will then purchase the property at the end of the rental period
for a final payment of £10 million. It is further agreed that rent will be paid quarterly in
arrears and will be increased every 4 years at the rate of 3% per annum compound. The
initial rent has been set at £3.8 million per annum with the first rental payment due exactly
three months after the date of occupation.
(i)
The developer was able to finance this investment from a loan at a borrowing rate of
7% per annum effective. Calculate the net present value of the profit from this
investment at the rate of borrowing.
(ii) Show that the discounted payback period of this investment falls within the 18th year
of the rental contract.
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