Armor Investment Company is considering the acquisition of a heavily depreciated building on 10 acres of land. It expects to rent the building as a storage facility and expects to collect cash flows equal to $101,000 next year. However, because depreciation is expected to increase, Armor expects cash flows to decline at a rate of 4 percent per year indefinitely. Armor expects to earn an IRR on investment return () at 13 percent. Required: a. What is the value of this property? b. Assume that after five years the building could be demolished and the land could be redeveloped with a strip retail improvement. The latter would produce NOI of $202,000 per year, grow at 3 percent per year, and cost $1 million to build. Investors currently earn a 10 percent IRR on such investments. What is the profit to be earned?
Armor Investment Company is considering the acquisition of a heavily depreciated building on 10 acres of land. It expects to rent the building as a storage facility and expects to collect cash flows equal to $101,000 next year. However, because depreciation is expected to increase, Armor expects cash flows to decline at a rate of 4 percent per year indefinitely. Armor expects to earn an IRR on investment return () at 13 percent. Required: a. What is the value of this property? b. Assume that after five years the building could be demolished and the land could be redeveloped with a strip retail improvement. The latter would produce NOI of $202,000 per year, grow at 3 percent per year, and cost $1 million to build. Investors currently earn a 10 percent IRR on such investments. What is the profit to be earned?
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
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Transcribed Image Text:Armor Investment Company is considering the acquisition of a heavily depreciated building on 10 acres of land. It expects to rent the
building as a storage facility and expects to collect cash flows equal to $101,000 next year. However, because depreciation is expected
to increase, Armor expects cash flows to decline at a rate of 4 percent per year indefinitely. Armor expects to earn an IRR on
investment return () at 13 percent.
Required:
a. What is the value of this property?
b. Assume that after five years the building could be demolished and the land could be redeveloped with a strip retail improvement.
The latter would produce NOI of $202,000 per year, grow at 3 percent per year, and cost $1 million to build. Investors currently earn a
10 percent IRR on such investments. What is the profit to be earned?
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