ABC Office REIT decides to buy an office building in Midtown Manhattan for $150 million. The company has an internal required rate of return of 10%. Rental revenues for the first year of operation are projected to be $8 million. Operating expenses are expected to be $3 million in the first year and grow at 3% thereafter. In addition to operating expenses, property maintenance expenses are projected to be $250k in the first year and is expected to grow at 3% per year. Rent in NYC is very cyclical and has sagged for the last few years. With economic growth returning, it is projected that rents will rise significantly before flattening out in later years (see revenue growth expectations below). At the end of ten years, the company expects to be able to sell the asset for $275 million.

A.) Is this purchase good for ABC (Yes or No)? Using a discounted cash flow model, calculate the IRR and net present value (NPV) of the investment to help explain your answer.

Answer rating: 100% (QA)

Answer To determine whether the purchase of the office building is good for ABC Office REIT we need ... View the full answer