You and your friend observe that apartment properties in your city are in Phase II: Expansion of
Question:
You and your friend observe that apartment properties in your city are in Phase II: Expansion of the Real Estate Cycle which means they're likely to keep increasing in profitability and value for the next few years.The two of you identify a vacant piece of land zoned for apartment use which you can purchase for $4 million today (an amount which will need to be paid immediately).
After detailed analysis you find that constructing apartments will take one year and cost $2 million (which will need to be paid at the end of Year 1).
Once the buildings are completed (at the end of the first year), you plan on renting out the spaces at annual profit (after all expenses) of $600,000 to be receivedat the endof each of the three years following the completion of the development (ex: your first $600,000 payment will be received at the end of Year 2).
Finally, having established a track record, you plan on selling the buildings for $10.6 million at the end of the fourth year.
Q1(b). Assuming your discount rate is 6.5%, what is the NPV of this project?Show your work by setting up the complete NPV equation (do not use Excel's NPV function...we'll learn more about that later).