General information You are an investor with 12 million cash to invest. You wish to purchase an ofce building with this cash. You have a choice between _three identical ofce buildings that are located in different areas of the same city. The following information is available regarding the _three possible investments: Distance from the CBD (km) 10 Floor space (square metres) 1,000 1,500 2,000 Asking price (GBP) 8,000,000 12,000,000 11,000,000 Mana-ement costs GBP er s-uare metre er month 15 5 10 :' 1. Commercial rent in the central business district (CBD) is 60 per square metre per month and decreases cumulatively by _ 5% for each kilometre located away from the CBD. Tip: Cumulatively means that, if the building is located 2 kilometres away from the CBD, rent decreases by 5% for the rst kilometre {which gives you 57), and by another 5% on 57 on the second kilometre, which gives you 54. :' 2. Building 2 has been certied as complying with sustainability standards. _T 3. A suitable discount rate for all areas is 6%. :' 4- There is a fountain outside Building 1 that you can persuade the local government to renovate by the time you purchase the property. Similar renovations to properties in the area have increased the rent charged per square metre by 3%. Question 1 Calculate the net present value and internal rate of return of each building assuming that net operating income will be received in perpetuity. Round your calculated net present value to the nearest pound and your calculated internal rate of return to two decimal places. (15 marks) Recommend, based on your calculations in Question 1.1, and purely from a nancial perspective, which building to invest in. (1 mark) (Answer the questions in the corresponding area of the Answer sheet) Question 2 Would your answer to Question 1.2 change if you were to finance the asking price of each building with a 50% loan-to-value mortgage? The loan bears interest at a rate of 4% and can be rolled over forever. The discount rate of 6% is still applicable. (11 marks) Assume, once again, that the asking price of the building is financed with a 50% loan-to-value mortgage. In addition, assume that banks have different preferences for investing into buildings in different parts of the city as they want to diversify their risk portfolio. Therefore, banks are willing to offer you different loan prices for the different buildings as follows: Building 1: 6.65% Building 2: 5.32% Building 3: 3.92% Calculate the internal rate of return and net present value of each building assuming that net operating income will be received in perpetuity, and the discount rate of 6% is still applicable. Round your calculated net present value to the nearest pound and your calculated internal rate of return to two decimal places. Question 3 In Questions 1 and 2, rent was assumed to be xed over time. In reality, this is not the case. The growth in rent for each of the three buildings is likely to differ because, even though the buildings are the same, they are in different locations. Assume that the level of rent that each building is currently at is fair market rent. How would you expect rent levels to change in the future? Use your understanding of urban economics to inform your answer. Please limit your answer to 300 words. (Answer the question in the corresponding area of the Answer sheet) 1.1 1.2 Question 1 Distance from the CBD {km} Floor space {square metres} Asking price [GBPJI Management costs [per square metre per month) Discount rate ['56) Sustainability certication [Yesi'NoJI Fountain [YesJ'NoJI Rent per square metre per month Management costs per square metre per month Net operating income per square metre per month Monthly.r net operating income Annual net operating income Present value of net operating income Asking price Transfer tax Initial investment Net present value Internal rate of return Start writing here: Building1 Building 2 Building 3 _ 5 10 1,000 1,500 2,000 E 8,000,000 E 12,000,000 E 11,000,000 E 15 E 5 E 10 6% 6% 6% No Yes No Yes No No E 62 E 46 E 36 E 15 E 5 E 10 E 4? E 41 E 26 E 46,800 E 62,141 E 51,854 E 561,600 E 'f45,686 E 622,248 E 9,360,000 E 12,428,100 E 10,370,800 E 8,000,000 E 12,000,000 E 11,000,000 E 160,000 E E 220,000 E 8 160 000 E 12 000 000 E 11 220 000 E 1,200,000 E 428,100 E 849,200 6.88% 6.21% 5.55% The investment should be in Building 1 because the net present value is the highest compared to others. 2.1 2.2 Question 2 Interest rate on loan Loan to value I II Borrowed amount Annual net operating income Annual interest expense Annual geared net operating income Present value of annual geared net operating income Initial investment Net present value Internal rate of return Start writing here: 4.00% 4.00% 4.00% 50% 50% 50% Interest rate on loan Loan to value Borrowed amount Annual net operating income Annual interest expense Annual geared net operating income Present value of annual geared net operating income Initial investment Net present value Internal rate of return