What should be the present value of the property today

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Question - An investor is considering the purchase of a small office building. The NO/ is expected to be the following:

Year 1, $204,000;

Year 2, $214,000;

Year 3, $224,000;

Year 4, $234,000;

Year 5, $244,000.

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 (/RR) 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 $2,340,000 today, what would be the underlying value of the land?

Reference no: EM133251834

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