You are an investor with 12 million cash to invest. You wish to purchase an office building with this cash. You have a choice between three identical office buildings that are located in different areas of the same city. The following information is available regarding the three possible investments:

NPVs and IRR for the three investments:

Question:

2.1 Recommend, using your calculations, and purely from a financial perspective, which building to invest in, 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.

2.2 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.

Building 1 Distance from the CBD (km) Floor space (square metres) Asking price (GBP) Management costs (per square metre per month) Discount rate (%) Sustainability certification (Yes/No) Fountain (Yes/No) 1 000 8 000 000 15 6% no yes Building 2 5 1 500 12 000 000 5 6% yes no Building 3 101 2 000 11 000 000 10 6% no no Rent per square metre per month Management costs per square metre per month Net operating income per square metre per month | 62 15 47 46 5 41 36 10 26 Monthly net operating income Annual net operating income 46 800 561 600 62 140 745 683 51 848 622 181 Present value of net operating income 9 360 000 12 428 057 10 369 687 Asking price Transfer tax Initial investment 8 000 000 160 000 8 160 000 12 000 000 12 000 000 11 000 000 220 000 11 220 000 Net present value Internal rate of return 1 200 000 6.88% 428 057 - 6.21% 850 313 5.55% Building 1 Distance from the CBD (km) Floor space (square metres) Asking price (GBP) Management costs (per square metre per month) Discount rate (%) Sustainability certification (Yes/No) Fountain (Yes/No) 1 000 8 000 000 15 6% no yes Building 2 5 1 500 12 000 000 5 6% yes no Building 3 101 2 000 11 000 000 10 6% no no Rent per square metre per month Management costs per square metre per month Net operating income per square metre per month | 62 15 47 46 5 41 36 10 26 Monthly net operating income Annual net operating income 46 800 561 600 62 140 745 683 51 848 622 181 Present value of net operating income 9 360 000 12 428 057 10 369 687 Asking price Transfer tax Initial investment 8 000 000 160 000 8 160 000 12 000 000 12 000 000 11 000 000 220 000 11 220 000 Net present value Internal rate of return 1 200 000 6.88% 428 057 - 6.21% 850 313 5.55%