Zenith Investment Company is considering the purchase of an office property. It has done an extensive market analysis and has estimated that based on current market supply/demand relationships, rents, and its estimate of operating expenses, annual NOI will be as follows:

YEAR	NOI
1	$1,000,000
2	1,000,000
3	1,000,000
4	1,200,000
5	1,250,000
6	1,300,000
7	1,399,000
8	1,379,170

A market that is currently oversupplied is expected to result in cash flows remaining flat for the next three years at $1,000,000. During years 4, 5, and 6, market rents are expected to be higher. It is further expected that beginning in year 7 and every year thereafter, NOI will tend to reflect a stable, balanced market and should grow at 3 percent per year indefinitely. Zenith believes that investors should earn a 12 percent return (r) on an investment of this kind.

PLEASE SOLVE USING EXCEL AND EXPLINATION

A. Assuming that the investment is expected to produce NOI in years 1-8 and is expected to be owned for seven years and then sold, what would be the value for this property today? (Hint: Begin by estimating the reversion value at the end of year 7. Recall that the expected IRP = 12% and the growth rate (g) in year 8 and beyond is estimated to remain level at 3%.)

B. What would the terminal capitalization rate (Rt) be at the end of year 7?

C. What explains the difference between the going-in and terminal cap rates?