Question

1. A small warehouse building is leased to a high quality tenant on a long term basis. The property is expected to produce $150,000 in net income from rental operations each year for seven years. The expected sale of the property at the end of the seventh year will generate additional net cash of $2,150,000. Assume the investor requires an 8% annual return on investments of similar risk. What is that investment worth today?

2. The owner of a 10-unit apartment building will deposit $3,000 per year ($300 per unit), in an interest bearing reserve account. These funds will be used to refurbish the apartments at the end of five years. If the deposits are made at the end of each year and will earn 3% interest compounded annually, what will be the accumulated value of those reserves at the end of 5 years?

Answer 1

1)

Value of Investment = Annual Net Income * (1 - (1 + annual return)^{-no of periods}) / annual return + Value of Property at the end of year 7 / (1 + annual return)⁷

Value of Investment = $150,000 * (1 - (1 + 8%)^-7) / 8% + $2,150,000 / (1 + 8%)⁷

Value of Investment = $2,035,459.859

2)

Accumulated value of the reserves = Deposit per year * ((1 + interest rate)^{no of periods} - 1) / interest rate

Accumulated value of the reserves = $3000 * ((1 + 3%)⁵ - 1) / 3%

Accumulated value of the reserves = $15,927.41