Question
Athena Investment Company is considering the purchase of an office property. After a careful review of the market and the leases that are in place,
Athena Investment Company is considering the purchase of an office property. After a careful review of the market and the leases that are in place, Athena believes that next years cash flow will be $100,000. It also believes that the cash flow will rise in the amount of $8,000 each year for the foreseeable future. It plans to own the property for at least 10 years. Based on a review of sales of properties that are now 10 years older than the subject property, Athena has determined that cap rates are in a range of 0.10. Athena believes that it should earn an IRR (required return) of at least 11 percent.
Required:
a. What is the estimated value of this office property (assume a 0.10 terminal cap rate)?
b. What is the current, or going-in, cap rate for this property?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started