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 $102,800 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.

Required:

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 $205,600 per year, grow at 3 percent per year, and cost $1 million to build. Investors currently earn a 10 percent IRR on such investments. What is the profit to be earned?