Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

An investor would like to buy an office building currently occupied by Pumpkin Pie Recipes Unlimited Co., LTD. The planned holding period is 4 years.

image text in transcribed

An investor would like to buy an office building currently occupied by Pumpkin Pie Recipes Unlimited Co., LTD. The planned holding period is 4 years. It obtained Pumpkin Pie Recipes Unlimited Co., LTD's rental agreement, as well as a report on vacancies and various operating expenses for local buildings on a per square foot basis, which allowed the investor to estimate the net operating income (NOI) for this office building for the next several years. In fact, what the investor figured out is that the NOI will equal $300,000 at the end of the 1st year, and will then increase by $40,000 each year for 3 more years, after which it will increase by 3% for a few years. Investor's required return is 12%. Investor's going out cap rate is 9%. If you can do the math in Excel with correct referencing to cells with intermediate results. This will allow you to avoid rounding errors. Otherwise, increase decimal places - the more the better! Say, 6 or even higher. NOI in year 1 is estimated at $300,000 (given). NOI in year 2 is estimated at $ Round to whole dollar. Don't use the $ sign. NOI in year 3 is estimated at $ Round to whole dollar. Don't use the $ sign. NOI in year 4 is estimated at $ Round to whole dollar. Don't use the $ sign. The reversion value at the end of the 4th year is estimated at $ and the current value of the office building is estimated at $ Round both to whole dollar & ROUND TO NEAREST THOUSAND (e.g., if you got 1,234,567 then type 1,235,000). Don't use the $ sign. If the asking price for the office building is higher than the estimated current value of the building, then the net present value (NPV) of this investment is Type "positive" or "negative

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Risk Manager Handbook

Authors: Philippe Jorion

6th Edition

0470904011, 978-0470904015

More Books

Students also viewed these Finance questions