1. Eva Investment Company is considering the purchase of an office property. It has done an extensive market analysis and has estimated that based on current market supply and demand relationships, rents, and its estimate of operating expenses, annual Nol will be as follows: End of Year NOI 1 1,000,000 2 1,000,000 3 1,000,000 4 1,200,000 End of Year NOI 5 1,250,000 6 1,300,000 7 1,339,000 8 1,379,170 A market that is currently oversupplied is expected to result in cash flows remaining flat for the next three years at $1,000,000. During years 4, 5 and 6, market rents are expected to be higher. It is further expected that beginning in year 7 and every year thereafter, NOI will tend to reflect a stable, balanced market and should grow at 3% per year indefinitely. Eva believes that investors should earn a 12% retur (r) on an investment of this kind. a. Assuming that the investment is expected to produce NOI in years 1-8 and is expected to be owned for 7 years and then sold, what would be the value for this property today? (Hint: Begin by estimating the reversion value at the end of year 7. Recall that the expected return = 12% and the growth rate () in year 8 and beyond is estimated to remain level at 3%) b. What would be the terminal capitalization rate at the end of year 7? c. What would be the "going-in" capitalization rate based on year 1 NOI? d. Using a terminal cap rate of 10% based on comparable sales of older properties for estimating REV in year 7 for the office property, what would be the value for this property today? e. Assuming that the value of property is expected to have a long-run growth rate (g) of 2%, what would be the value for this property today