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: Building 1 Building 2 Building 3 10 Distance from the CBD (km) Floor space (square metres) Asking price (GBP) Management costs (GBP per square metre per month) 1.000 8.000.000 15 1.5001 12.000.000 2.000 11.000.000 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 first kilometre (which gives you 57), and by another 5% on 57 on the second kilometre, which gives you 54. Building 2 has been certified as complying with sustainability standards. A suitable discount rate for all areas is 6%. 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%. The local government will impose a 2% tax, by the time you complete the purchase of the property, on the sale of all properties that are not certified as compliant with sustainability standards. Ignore the effects of any other taxes. Question 1 1.1 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) 1.2 Recommend, based on your calculations in Question 1.1, and purely from a financial perspective, which building to invest in. (1 mark) (Answer the questions in the corresponding area of the Answer sheet) 1.1 Building 1 0 Building 2 5 1.500 12.000.000 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% Building 3 10 2.000 11.000.000 101 6% 5 6% yes no yes no Rent per square metre per month Management costs per square metre per month Net operating income per square metre per month Monthly 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 1.2 Start writing here: 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: Building 1 Building 2 Building 3 10 Distance from the CBD (km) Floor space (square metres) Asking price (GBP) Management costs (GBP per square metre per month) 1.000 8.000.000 15 1.5001 12.000.000 2.000 11.000.000 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 first kilometre (which gives you 57), and by another 5% on 57 on the second kilometre, which gives you 54. Building 2 has been certified as complying with sustainability standards. A suitable discount rate for all areas is 6%. 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%. The local government will impose a 2% tax, by the time you complete the purchase of the property, on the sale of all properties that are not certified as compliant with sustainability standards. Ignore the effects of any other taxes. Question 1 1.1 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) 1.2 Recommend, based on your calculations in Question 1.1, and purely from a financial perspective, which building to invest in. (1 mark) (Answer the questions in the corresponding area of the Answer sheet) 1.1 Building 1 0 Building 2 5 1.500 12.000.000 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% Building 3 10 2.000 11.000.000 101 6% 5 6% yes no yes no Rent per square metre per month Management costs per square metre per month Net operating income per square metre per month Monthly 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 1.2 Start writing here