Question

You expect to receive the annual property Net Operating Income (NOI) from a certain property as followsYear 1 $20,000 Year 2 $22,000 Year 3 $30,000 Year 4 $31,000 Year 5 $40,000 In addition, you expect that you can sell the property at the end of the 5th year for 10 times its expected NOI of that year.A. If your opportunity cost of capital (OCC) is 10%, 1) What is the Present Value of the Property Income over the 5 years? 2) What is the Present Value of the Net Sales Proceeds received in Year 5 3) What is the Total Present Value of the property given the 5 year holding period? 4) Ifyou offer to pay the amount you calculate in Ques A3) above to purchase the property, what would be your total return on the investment? 5) If you offer to pay the amount you calculate in Ques A3) to purchase the property, what do you forecast to be the appreciation in value on the property B. If you pay $350,000 for the property at Year 0, what is the net present value (NPV) of a deal? C. In the situation given in the previous question, what is the IRR?

Answer 1

Year 1 Year 2 Year 3 Year 4 Year 5

1. Present value $18,180 $18,172 $22,530 $21,173 $24,840

2. Present value of the net sales proceeds = $248,400

3. Total present value of the property = $104,895

4. Total return on the investment = $143,505

5. Forecasted appreciation in value on the property = $295,105

5B. The net present value (NPV) of the deal, if you pay $350,000 at Year 0 = -$101,600

5C. The IRR, using the short-cut method, = 15%

Step-by-step explanation:

a) Data and Calculations:

Opportunity cost of capital (OCC) = 10%

NOI at the end of the 5th year = $40,000

Selling price at the end of the 5th year = $400,000 ($40,000 * 10)

Year 1 Year 2 Year 3 Year 4 Year 5

Net Operating

Income (NOI) $20,000 $22,000 $30,000 $31,000 $40,000

Discount factor 0.909 0.826 0.751 0.683 0.621

1. Present value $18,180 $18,172 $22,530 $21,173 $24,840

2. Present value of the net sales proceeds = $248,400 ($400,000 * 0.621)

3. Total present value of the property = $104,895 ($18,180 + $18,172 + $22,530 + $21,173 + $24,840)

4. Total return on the investment = $143,505 ($248,400 - $104,895)

5. Forecasted appreciation in value on the property = $295,105 ($400,000 - $104,895)

5B. The net present value (NPV) of the deal, if you pay $350,000 at Year 0 = -$101,600 ($248,400 - $350,000)

5C. The IRR, using the short-cut method, = 15% (100%/5 * 75%)