Expected to generate net revenue

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Reference no: EM131437118

A real-estate investor has the opportunity to purchase an apartment complex. The apartment complex costs $400,000 and is expected to generate net revenue (net after all operating and finance costs) of $6000 per month. Of course, the revenue could vary because the occupancy rate is uncertain. Considering the uncertainty, the revenue could vary from a low of -$1000 to a high of $10,000 per month. Assume that the investor's objective is to maximize the value of the investment at the end of l0 years. a Do you think the investor should buy the apartment complex or invest the $400,000 in a 10-year certificate of deposit earning at 9.5%?Why? b The city council is currently considering an application to rezone a nearby empty parcel of land. The owner of that land wants to build a small electronics-assembly plant. The proposed plant does not really conflict with the city's overall land use plan, but it may have a substantial long-term negative effect on the value of the nearby residential district in which the apartment complex is located. Because the city council currently is divided on the issue and will not make a decision until next month, the real estate investor is thinking about waiting until the city council makes its decision. If the investor waits, what could happen? What are the trade-offs that the investor has to make in deciding whether to wait or to purchase the complex now? c Suppose the investor could pay the seller $ 1000 in earnest money now, specifying i n the purchase agreement that if the council's decision is to approve the rezoning, the investor can forfeit the $1000 and forego the purchase. Draw and solve a decision tree showing the investor’s three options. Examine the alternatives for dominance. If you were the investor, which alternative would you choose? Why?

Reference no: EM131437118

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