Ronald Trump is considering the purchase of the Chippewa Hotel and has asked for your assistance in

Question:

Ronald Trump is considering the purchase of the Chippewa Hotel and has asked for your assistance in estimating the market value of the property. You have been provided with the following information regarding the income streams over the hotel’s expected remaining life:

Year Annual Income Year Annual Income Year Annual Income d $400,000 7 580,000 13 805,000 2 425,000 8 610,000 14 845,000 455,000 9 645,000 LS 820,000 4 490,000 10 685,000 16 750,000 5 520,000 a 725,000 17 700,000 6 550,000 12 765,000 18 1,200,00*

“Includes sales price of hotel at end of year twenty.

Assume a capitalization rate of 10%.

Required:

1. Calculate the market value of the Chippewa Hotel by discounting the stabilized years’ income.

2. If the capitalization rate was changed to 12%, what would be the value of the hotel?

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