Consider a plot of land. You can construct an office building at a cost of $5m or a hotel at a cost of $7m. For the office building you expect an NOI in year 1 of $240,000 and an NOI in year 2 of $400,000. For the hotel you expect an NOI in year 1 of $360,000 and an NOI in year 2 of $500,000. After year 2, the NOI will grow at 4% for both properties. Your discount rate is 10% in both cases. What is the estimated value of your plot of land?

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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Consider a plot of land. You can construct an
office building at a cost of $5m or a hotel at a
cost of $7m.
For the office building you expect an NOI in
year 1 of $240,000 and an NOI in year 2 of
$400,000.
For the hotel you expect an NOI in year 1 of
$360,000 and an NOI in year 2 of $500,000.
After year 2, the NOI will grow at 4% for both
properties.
Your discount rate is 10% in both cases.
What is the estimated value of your plot of
land?
Transcribed Image Text:Consider a plot of land. You can construct an office building at a cost of $5m or a hotel at a cost of $7m. For the office building you expect an NOI in year 1 of $240,000 and an NOI in year 2 of $400,000. For the hotel you expect an NOI in year 1 of $360,000 and an NOI in year 2 of $500,000. After year 2, the NOI will grow at 4% for both properties. Your discount rate is 10% in both cases. What is the estimated value of your plot of land?
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