Question

your property is priced with an ex-ante risk premium of 6% over the ten-year treasury trading at 3%. the asset is payingn $10 NNN rennt for 30 years. Assume no change in pricing yields, no capital expenditures, no purchase or sale fees and a sale in year five. The unlevered IRR is 8%. what is the npv?

Answer 1

Ten Year Treasury Rate = Risk Free Rate = Rf = 3 %

Ex-Ante (predicted) Risk Premium = RPM = 6 %

Annual Yield = Y = Rf + RPM = 3 + 6 = 9 % and IRR = 8 %

Annual Rent = $ 10 NNN and Property Tenure = 30 years

Therefore, Initial Investment = II = Annual Rent x (1/IRR) x [1-{1/(1+IRR)^(30)}]

II = 10 x (1/0.08) x [1-{1/(1.08)^(30)}] = $ 112.5778 NNN or $ 112.578 NNN approximately

Therefore, NPV = 10 x (1/Y) x [1-{1/(1+Y)^(30)}] - II = 10 x (1/0.09) x [1-{1/(1.09)^(30)}] - 112.578 = - $ 9.8415 NNN approximately.