You've inherited a building in a busy downtown area of a small city. It has retail on the bottom, currently leased by a national coffee brand, and three apartments on the upper floors. Net cash flows from the property are expected to be about $132,000 at the end of this first year of your ownership. And a real estate broker helping you evaluate the property says you can depend on about 5.0% annual increases in those net cash flows.You are facing two options to get value from the property: (1) Continue to own the building and reap the benefits of those growing cash flows. (2) After some needed updates, convert the three apartments and the retail space into condos. This is a creative way to sell off the various units separately. The expected cash flows from those sales are listed below, and it is reasonable to expect the units to be sold, and their sale cash flows to be finalized, at the end of Year 1.An appropriate required return is an annual 9.0%. Assuming all the cash flows mentioned here are net cash inflows, what is the difference between the values (today) of the two options available? (Consider this difference an absolute value, regardless of which option is the higher value.)NET CASH FLOWS FROM CONDO SALES Apartment #1: $250,000 Apartment #2: $250,000 Apartment #3: $225,000 Retail Space: $420,000
You've inherited a building in a busy downtown area of a small city. It has retail on the bottom, currently leased by a national coffee brand, and three apartments on the upper floors. Net cash flows from the property are expected to be about $132,000 at the end of this first year of your ownership. And a real estate broker helping you evaluate the property says you can depend on about 5.0% annual increases in those net cash flows.
You are facing two options to get value from the property: (1) Continue to own the building and reap the benefits of those growing cash flows. (2) After some needed updates, convert the three apartments and the retail space into condos. This is a creative way to sell off the various units separately. The expected cash flows from those sales are listed below, and it is reasonable to expect the units to be sold, and their sale cash flows to be finalized, at the end of Year 1.
An appropriate required return is an annual 9.0%. Assuming all the cash flows mentioned here are net
NET CASH FLOWS FROM CONDO SALES
- Apartment #1: $250,000
- Apartment #2: $250,000
- Apartment #3: $225,000
- Retail Space: $420,000
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