Problem 3 (Brueggeman 17th Ed 10-6) 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 $7,000 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 10%. Athena believes that it should earn an IRR (required return) of at least 12 percent.

a. What is the estimated value of this office property (assume a 10% terminal cap rate)? b. What is the current, or going-in, cap rate for this property? c. What accounts for the difference between the cap rate in (b) and the 10% terminal cap rate in (a)? d. What assumptions are being made regarding future economic conditions when using current comparable sales to estimate terminal cap rates?