Question

A client has requested advice on a potential investment opportunity involving an income-producing property. She would like you to determine the internal rate of return of the investment opportunity based on the following information: expected holding period: years; end of first year NOI estimate: $110,000; NOI estimates in subsequent years will grow by 6 % per year; price at which the property is expected to be sold at the end of year 5: $1,615,205.22; current market price of the property: $1,475,667.71.

Answer 1

	T=0	T=1	T=2	T=3	T=4	T=5
Initial Cost	- 1,475,667.71
NOI		110,000.00	116,600.00	123,596.00	131,011.76	138,872.47
Salvage Value						1,615,205.22
Total	- 1,475,667.71	110,000.00	116,600.00	123,596.00	131,011.76	1,754,077.69

The cashflows in each of the years (with T=0 meaning now, and T=1 meaning the end of the 1st year and so on) are shown in the table above

IRR of all the above cashflows (and that of the investment opportunity) is 9.87%