Question

Calculate the Value of an asset, assuming the NOI is $140,000 per year for 12 years with the first cash flow at the end of year 1. The value of the asset will increase by 80% over the 12 years. The discount rate is 12%. (hint 1: V= (PV of PMTS) + {(1+increase in value)/(1+discount rate)^N } times V.)

Answer 1

Annual cashflow from asset (PMT) = NOI = $140,000

No of Annual cashflows from asset (N) = 12

Discount Rate (I) = 12%

Present value of Income from asset (PV) = ?

Using financial calculator or PV function in excel,

Present value of Income from asset (PV) = $ 867,212.39

Value of asset will increase by 80% over the period of 12 years,

Therefore, Value of asset (V) = (PV of PMTS) + {(1+increase in value)/(1+discount rate)N } x V

Therefore, Value of asset (V) = 867,212.39 + {(1+0.80)/(1+0.12)12} x V

Therefore, Value of asset (V) = 867,212.39 + {1.80V / 3.8960}

Therefore, Value of asset (V) = 867,212.39 + 0.4620V

Therefore, V = 867,212.39 + 0.4620V

Therefore 0.5380 V = 867,212.39

Therefore V = $1,611,964.39

Therefore, Value of asset (V) = $1,611,964.39