Principles of Accounting Volume 2
19th Edition
ISBN: 9781947172609
Author: OpenStax
Publisher: OpenStax College
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Please correct answer and don't used hand raiting
Transcribed Image Text:An investor is considering the purchase of a small office building. The NOI is expected to be the following:
Year 1, $222,000; Year 2, $232,000; Year 3, $242,000; Year 4, $252,000; Year 5, $262,000. The property will
be sold at the end of year 5 and the investor believes that the property value should have appreciated at a
rate of 3 percent per year during the five-year period. The investor plans to pay all cash for the property
and wants to earn a 10 percent return on investment (IRR) compounded annually.
Required:
a. What should be the present value of the property today?
b. What should be the property value (REV) at the end of year 5 in order for the investor to earn the 10%
IRR?
c. Based on your answer in (b), if the building could be reproduced for $2,520,000 today, what would be
the underlying value of the land? SHOW HOW TO DO IT IN EXCEL.WITH FORMULAS
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