19.9
Ron Flessner is interested in purchasing the Wesleyan Motel in central Illinois. He desires
an 18% return on his investments and can borrow any funds required for the purchase at
an annual interest rate of 10%. Assume that the mortgage constant would be 10.8% and
that he would borrow 80% of the market value of the property.
His consultants have indicated the income stream for the desired property for the next
7 years as follows:
	YEAR	Income Stream
	1	$1,100,000
	2	1,050,000
	3	1,000,000
	4	930,000
	5	850,000
	6	750,000
	7	600,000
	7	800,000*
	*Expected sales value at the end of year seven.
REQUIRED
1. Determine the market value of the Wesleyan Motel by discounting the income stream over
its investment life.
2. Assuming he can borrow only 70% of the purchase price, calculate the market value basked on
the above.
3. Independent of number 2 above, assume a financial insitituion would lend funds at 9%
(mortgage constant of 9.7%). Holding everything else the same, calculate the estimated market
value.