5. Armor Investment Company is considering the acquisition of a heavily depreciated building on 10 acres of land. It expects to rent the building as a storage facility and expects to collect cash flows equal to $100,000 next year. However, because depreciation is expected to increase, Armor expects cash flows to decline at a rate of 4 percent per year indefinitely. Armor expects to earn an IRR on investment return (r) at 13 percent.

PLEASE SOLVE USING EXCEL AND EXPLANATION

A. What is the value of this property?

B. Assume that after five years the building could be demolished and the land could be redeveloped with a strip retail improvement. The latter would produce NOI of $200,000 per year, growing at 3 percent per year, and cost $1 million to build. Investors currently earn a 10 percent IRR on such investments.How would this affect your estimate of value in (a)?