Your company is exploring the opportunity to buy an office building that is expected to generate a Net Operating Income (NOI) of $1,200,000 next year. The NOI is expected to grow at 3% each year. After 5 years (i.e. at the end of the 5th year) you can expect to sell the building for $22,000,000.

a) What is the cap rate of the building referenced above if it is valued today at $14,800,000?

Cap rate = 1,200,000 / 14,800,000 = 8.11%

b) Suppose there is another building just across the street that is very similar to the one you just valued. Next year’s NOI for the other building is projected to be $1,300,000. What is a good approximation for the value of the building, based upon information from part a) of the problem?