Athena Investment Company is considering the purchase of an office property. After a careful review of the market and the leases that are in place, Athena believes that next year's cash flow will be $100,000. It also believes that the cash flow will rise in the amount of $5,600 each year for the foreseeable future. It plans to own the property for at least 10 years. Based on a review of sales of properties that are now 10 years older than the subject property, Athena has determined that cap rates are in a range of 0.10. Athena believes that it should earn an IRR ( required return) of at least 11 percent. Required: a. What is the estimated value of this office property (assume a 0.10 terminal cap rate)? b. What is the current, or going - in, cap rate for this property?
Athena Investment Company is considering the purchase of an office property. After a careful review of the market and the leases that are in place, Athena believes that next year's cash flow will be $100,000. It also believes that the cash flow will rise in the amount of $5,600 each year for the foreseeable future. It plans to own the property for at least 10 years. Based on a review of sales of properties that are now 10 years older than the subject property, Athena has determined that cap rates are in a range of 0.10. Athena believes that it should earn an IRR ( required return) of at least 11 percent. Required: a. What is the estimated value of this office property (assume a 0.10 terminal cap rate)? b. What is the current, or going - in, cap rate for this property?
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
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Transcribed Image Text:Athena Investment Company is considering the
purchase of an office property. After a careful review
of the market and the leases that are in place, Athena
believes that next year's cash flow will be $100,000.
It also believes that the cash flow will rise in the
amount of $5,600 each year for the foreseeable
future. It plans to own the property for at least 10
years. Based on a review of sales of properties that
are now 10 years older than the subject property,
Athena has determined that cap rates are in a range
of 0.10. Athena believes that it should earn an IRR (
required return) of at least 11 percent.
Required:
a. What is the estimated value of this office property
(assume a 0.10 terminal cap rate)?
b. What is the current, or going - in, cap rate for this
property?
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