Question
For the purposes of a back of the envelope calculation at this early stage in planning, assume that inflation will proceed at an average rate
For the purposes of a back of the envelope calculation at this early stage in planning, assume that inflation will proceed at an average rate of 2% for the foreseeable future, and that other projects in the Charleston market have recently traded at a 6% cap rate. What is the appropriate nominal discount rate for calculating the present value of the returns for project? Explain the reasoning behind your choice of a discount rate.
The team projects that the average sale price of a condo unit in the new development would be approximately $400,000 when the building is completed. Assuming that planning and construction take two years, what is the present value (PV) of selling 75 units for $400,000 each at the end of Year 2?
Given your PV from question 2, what is the maximum amount of money that your team can invest into this project to generate a positive net present value (NPV) if you plan to sell individual condo units?
Nimish has provided some quick, rough projections of expected rental revenues through Year 10, if the company decides to hold onto the building and let the units out for rent. Nimishs assumptions are shown in blue on the accompanying spreadsheet.
Calculate the cash flows on the property for each year.
Calculate the PV of the property cash flows for each year.
Assume that the total development costs for the building are the same as your answer to question 3. What is the present value of all potential before-tax cash flows through Year 5? With those revenues in mind, what is the minimum price at which you would have to sell the building in Year 5 to generate an NPV greater than zero?
What is the minimum price at which you would have to sell the building in Year 10 to generate an NPV greater than zero?
Nimish's Assumptions: \begin{tabular}{|l|r|} \hline Initial Average Rent Per Unit: & $2,000 \\ Total Number of Units: & 75 \\ Annual Rental Growth: & 3.00% \\ Average Vacancy Rate: & 5.00% \\ OpEx as Percentage of PGI: & 35.00% \\ CapEx as Percentage of NOI: & 10.00% \\ \hline \end{tabular} Nimish's Projections: PV of Net Cash Flow PV of Net Cash Flow Through Year 5 Required Sale Price of Building: \begin{tabular}{|l|l|} \hline PV of Net Cash Flow Through Year 10: \\ Required Sale Price of Building: & \\ \hline \end{tabular} Nimish's Assumptions: \begin{tabular}{|l|r|} \hline Initial Average Rent Per Unit: & $2,000 \\ Total Number of Units: & 75 \\ Annual Rental Growth: & 3.00% \\ Average Vacancy Rate: & 5.00% \\ OpEx as Percentage of PGI: & 35.00% \\ CapEx as Percentage of NOI: & 10.00% \\ \hline \end{tabular} Nimish's Projections: PV of Net Cash Flow PV of Net Cash Flow Through Year 5 Required Sale Price of Building: \begin{tabular}{|l|l|} \hline PV of Net Cash Flow Through Year 10: \\ Required Sale Price of Building: & \\ \hline \end{tabular}
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