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Athena Investment Company is considering the purchase of an office property. After a careful review of the market and the leases that are in place, Athena believes that next year's cash flow will be $100,000. It also believes that the cash flow will rise in the amount of $9,600 each year for the foreseeable future. It plans to own the property for at least 10 years. Based on a review of sales of properties that are now 10 years older than the subject property, Athena has determined that cap rates are in a range of 0.10. Athena believes that it should earn an IRR (required return) of at least 12 percent.
Required:
a. What is the estimated value of this office property (assume a 0.10 terminal cap rate)?
b. What is the current, or going-in, cap rate for this property?
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