Use the following information for the next TWO questions. The owner of a 30-year
ID: 2799286 • Letter: U
Question
Use the following information for the next TWO questions. The owner of a 30-year old building plans to invest $4 million to renovate the property at the end of year 2. The first NOI after renovation will start to roll in at the end of year 3 and is estimated at $2.0 million growing at 8% per year. The renovated property, if properly maintained, will last forever. The appropriate discount rate for the NOI after renovation is 15%,. 19. If the building is currently vacant, the value of the 30-year old property to the owner is nearest: a) 18.6 million b) 19.9 million c) 21.6 million d) 22.2 million e) 23.6 million 20. If the property is currently leased for an annual NOI of $1.0 million for the next two years before renovation and the appropriate discount rate before renovation is 20%. The value of the old property to the owner is nearest: a) 19.45 million b) 20.11 million c) 22.17 million d) 22.94 million e) 23.71 millionExplanation / Answer
Cash flow at the end of year 2=$4 million
NOI at the end of year 3 =$2 million
Growth rate of NOI=8%=0.08
Discount rate=15%=0.15
The income will be in perpetuity.
Present value (PV) of the income in perpetuity at the end of year 2=$2 million/(R-g)
R=Discount rate=0.15
g=growth rate of NOI=0.08
PV of NOI at end of year2=$2million/(0.15-0.08)=(2/0.07)=$ 28.57143million
Net Present value(NPV) at end of year2=(28.57143-4)= $24.57143million
Value of $24.57143 at end of year0(Today)= 24.57143/((1+0.15)^2)
The value of the property=24.57143/(1.15^2)=$ 18.57953 million rounded to $18.6 million
Answer:
.a) 18.6 million
.20. if the building is currently leased for annual NOI of $1 million and appropriate discount rate before renovation=20%
The Present Value of NOI of $ 1 million per year for two years:
=1/1.2+1/(1.2^2)= $1.52778 million
Present value if the property was vacant=$ 18.57953 million
Value of the old property=$ 18.57953 million +$1.52778 million=$20.10731million Rounded to=$20.11 million
Answer:
.b)$20.11million