Question

Lustar Properties (LP) is considering an investment in a leasehold property. After 10 years, the ownership will automatically transfer to the seller. However, the property could be offered as a parking lot to the adjoining hotel which will annually pay $ 100,000 at the end of the first 5 years and annually $ 110,000 for the five years after. LP expects to earn an annual return of 10% on this investment. How much should they pay for the property today? Will the value increase or decrease if LP lowers their return expectations?

a) $ 637,994.51; decrease

b) $ 1,050,000; decrease

c) $ 1,050,000; increase

d) $ 637,994.51; increase

Answer 1