Question

ace investment company is considering the purchase of the apartment arms project. next year's noi and cash flow is expected to be $2,000,000, and based on ace's economic forecast, market supply and demand and vacancy levels appear to be in balance. as a result, noi should increase at 4 percent each year for the foreseeable future. ace believes that it should earn at least a 13 percent return on its investment. 1. assuming the above facts, what would the estimated value for the property be now? 2. what going-in cap rates should be indicated from recently sold properties that are comparable to apartment arms? 3. assuming that in part (a) the required return changes to 12 percent, what would the value be now? 4. assume results in part (c). what should the investor now be observing regarding the price of comparable sales? what market forces may be accounting for the differences in value between (a) and (c)?

Answer 1

The estimated value for the property is $22,222,222.22. The going-in cap rate indicated from recently sold properties is approximately 9%. If the required return changes to 12%, the value of the property would be $25,000,000. The increased price of comparable sales may be due to market forces such as increased demand or decreased supply.

Step-by-step explanation:

To calculate the estimated value for the property, we need to determine the present value of the expected NOI (Net Operating Income) and cash flow. Since NOI is expected to increase at a constant rate of 4% each year, we can use the formula for the present value of a growing perpetuity to calculate the estimated value:

Estimated value = NOI / (required return - growth rate)

Plugging in the values, we get: Estimated value = $2,000,000 / (0.13 - 0.04) = $2,000,000 / 0.09 = $22,222,222.22

Therefore, the estimated value for the property now is $22,222,222.22.

To determine the going-in cap rates indicated from recently sold properties that are comparable to Apartment Arms, we need to divide the NOI by the property value. Since we now know the property value ($22,222,222.22), we can calculate the going-in cap rate:

Going-in cap rate = NOI / Property value

Plugging in the values, we get: Going-in cap rate = $2,000,000 / $22,222,222.22 ≈ 0.09 or 9%.

Therefore, the going-in cap rate indicated from recently sold properties that are comparable to Apartment Arms is approximately 9%.

If the required return changes to 12%, we can use the same formula to calculate the new value:

New value = NOI / (required return - growth rate)

Plugging in the values, we get: New value = $2,000,000 / (0.12 - 0.04) = $2,000,000 / 0.08 = $25,000,000.

Therefore, if the required return changes to 12%, the value of the property now would be $25,000,000.

If we compare the value in part (a) ($22,222,222.22) with the value in part (c) ($25,000,000), we can observe that the price of comparable sales has increased. This indicates that market forces, such as increased demand or decreased supply, may be accounting for the differences in value between (a) and (c).