Reference no: EM132642120

Problem 1: Katie O'Brien is analyzing a small apartment building for a client for possible sale. The gross rents are $250,000/year. Due to limited supply in the market, the rents are expected to increase 3.0% through year-three and drop to 2.0% (rate of inflation) starting in year-four as new supply comes on-line. There is currently no vacancy, but is expected to increase to 3.0% as the new supply comes on line. Katie assumes a more typical vacancy and credit risk of 5% in her analysis. Expenses are in line with other properties of the same vintage and run about 50% of gross receipts and are expected to grow by 2% per year. Katie is going to estimate the terminal cap rate using the Gordon Model. The discount rate and the long-term required rate of return are both 8%. You recommend to Katie and help her to make a discounted cash flow analysis on the property and recommend a 5-year DCF to get an accurate valuation estimate. What is the current valuation estimate for the apartment building.