Real Estate Chapter 14

Assume that a piece of land is currently valued at $50,000. If this piece of land is expected to appreciate at an annual rate of 5% per year for the next 20 years, how much will the land be worth at the end of 20 years?

$132,665

Suppose a U.S. Treasury bond will pay a lump sum of $3,000 five years from now. If the current required rate of return on this 5-year treasury bonds is 4.5%, how much is the bond worth today?

$2,407.35

An office building has a projected net income of $45,000 per year, and its projected net sales price after five years is $250,000. Considering its risk, you require a 16% annual return on this investment. How much would you be willing to pay for it?

$266,371.47

Suppose a firm expects to receive the following cash flows over the next four years: Year 1: $1,200 Year 2: $1,200 Year 3: $1,500 Year 4: $1,000 Discount rate=10% What is the present value of this uneven cash flow stream? (round to the nearest cent)

$3892.63

Ben Franklin invested 1,000 pounds (about $50,000 today) at the beginning of the year 1785. Assume the average annual return he earned from 1785 to the end of 1984 (200 years) was 2.4%. How much was Franklin's investment worth at the end of 1984? (Round your answer to the nearest cent).

$5,740,653.48

Paul wants to buy a new condo six years from now and plans to save $8,000 per year for the down payment, beginning one year from today. He will invest in a fund that offers an 8% return. How much will Paul have accumulated after he makes the 6th deposit, 6 years from now?

$58,687

What is the present value of an income-generating property that is expected to produce an after-tax cash flow of $20,000 in year one, $22,000 in year two, $25,000 in year three, $30,000 in year four, and $30,000 in year five? Assume that the after-tax discount rate is 15%. (round to the nearest cent)

$82,532.27

Assume an industrial building can be purchased for $1,500,000 today, is expected to yield cash flows of $80,000 for each of the next five years (with the cash flows occurring at the end of each year), and can be sold at the end of the fifth year for $1,625,000. Assuming that the required rate of return is 10%, calculate the NPV for this transaction.

-187,739.91

Tom is developing an apartment building in downtown Boston. He requires an 20% going-in IRR on equity on the expected 20-year investment. The current 20-year Treasury bond (T-bond) yield is 3%. What is the risk premium on Tom's investment?

17%

A house is bought for $240,000 in at the end of 2010. By the end of 2015, it seems that the market has increased at a rate of 8% per year since 2010. What is the estimated current value of the house?

352,638.74

The average annual return for the S&P 500 since its inception in 1928 through 2014 is approximately 10%. assume a person invested $1.00 in S&P 500 Index in the end of 1928. It would have grown to $_________in the end of 2014 (Round your answer to the nearest cent).

3628.87

Assume an industrial building can be purchased for $1,500,000 today. The investment is expected to yield cash flows of $80,000 for each of the next five years (with the cash flows occurring at the end of each year), and can be sold at the end of the fifth year for $1,625,000. Calculate the internal rate of return (IRR) on this investment.

6.78%

You are investing your money at a compound annual return of 8%. It will take about ________ years for your money to double. (Round your answer to the nearest integer)

9, 9.0065, or 9.01

As the opportunity cost of waiting for future cash flows increases, the present value of those future cash flows

Decreases

A cash inflow or outflow that is forecasted to occur once over the analysis period, should be entered in the Blank______ register.

FV

A fixed (level) cash inflow or outflow (ex., monthly or annually) should be entered in the

PMT register

Arbitrage means taking advantage of temporary differences in market prices to make a profit. Assume two real estate companies, A and B, both operate in New York area and focus on office properties. You have determined that Company A's shares have an intrinsic value of $20 per share but are trading at $22 per share, while Company B's shares are worth $25 per share but are trading at $22 per share. What would a rational investor (or an arbitrageur) do to take advantage of this price difference (no short-selling constraint and transaction fee)?

Sell short company A's shares, buy the same number of company B's shares.

Which of the following statements is correct?

The cash flows for an annuity due must all occur at the beginning of each period.

Which of the following statements is correct?

Timelines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

True or false: The U.S. Federal Reserve ("The Fed") periodically increase interest rates when the risk of overheated economy is perceived. Rate hikes are viewed as bad for real estate investors because the present value of future cash flows is inversely related to the magnitude of the interest rate used for discounting.

True

True or false: The internal rate of return (IRR) is the discount rate that makes the present value of cash inflows from a particular investment equal to the present value of the cash outflows.

True

When you invest in a risky investment, you should expect to earn:

at least what you could earn on an alternative investment of equal risk.

Calculation of the expected future value of a house in 5 years growing at an expected rate is called

compounding

The increase in the value of a one time (lump sum) investment that grows at a given rate will be greatest with Blank______ compounding.

daily

Opportunity cost is the return the investor is forgoing on an alternative investment of _______ risk in order to invest in the current opportunity.

equal or equivalent

If the (going-in) IRR exceeds the investor's required rate of return, the investor

should accept the investment if she has the required equity investment available

As the perceived risk of expected future cash flows increases,

the required (expected) return should increase

The expected (required) IRR of an investment is composed of a risk-free rate and the required risk premium. The risk-free component is compensation for

the time value of money

Last year, Harvey Realty Inc.'s sales were $450 million. If sales grow at 12% per year, how large (in millions) will they be 5 years later?

$793.05

An investor originally paid $22,000 for a vacant lot 12 years ago. If the investor is able to sell the lot today for $63,000, what would be her annual rate of return (rounded to the nearest full percent)?

9%

Which of the following investments is generally considered the least risky?

U.S. Treasury securities

Assume an investment is expected to be worth $10,000 at the end of ten years and that you expect to earn 10% (annually) on investments of similar risk. The present value of this investment opportunity to you is therefore $3,855. Which of the following is true?

You're happy to pay $3,000 for this investment today. If you invested $3,000 for 10 yrs. at 10% you wouldn't accumulate $10,000 at the end of 10 yrs.

The compounding of interest causes the value of an investment to grow at a(n) _______ rate.

increasing or exponential

Future benefits are discounted because of

risk opportunity cost

Timelines are useful because they allow us to_______ the time pattern of money returns.

visualize or see

Jenny wants to go to Europe four years from now. She can save $4,000 per year, beginning one year from today. She plans to invest the funds in the S&P 500 index fund that she thinks will return 10% per year. Under these conditions, how much will she have saved after she makes the 4th deposit, 4 years from now?

$18,564

What is the PV of an ordinary annuity (rounded to the nearest dollar) with 10 annual payments of $2,700 if the appropriate interest rate is 5.5 percent?

$20,352

An apartment property has a projected net income of $15,000 per year, and its projected net sales price after five years is $300,000. Considering its risk, you require a 14% annual return on this investment. How much would you be willing to pay for it today?

$207,306.81

You have a chance to buy an annuity that pays $2,000 at the end of each year for 4 years. You could earn 5 percent on your money in other investments with equal risk. What is the most you should pay for the annuity today (rounded to the nearest dollar)?

$7,091.90

Suppose an investor is interested in purchasing the following income producing property at a current price of $450,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: Year 1 = $40,000, Year 2 = $45,000, Year 3 = $50,000, Year 4 = $55,000. The property will be sold at the end of Year 4, generating an additional $500,000 from the sale. Assuming that the required rate of return is 12%, what is the NPV of the project?

$9,889.56

Suppose an investor is interested in purchasing the following income producing property at a price of $450,000. The investor has estimated the expected cash flows over the next four years to be as follows: Year 1 = $40,000, Year 2 = $45,000, Year 3 = $50,000, Year 4 = $55,000. Assuming that the estimated proceeds from selling the property at the end of year four is $500,000, what is the IRR of the project?

12.69%

True or false: An annuity due is defined as a fixed amount of money paid or received at the end of every period.

False

True or false: An ordinary annuity is defined as a fixed amount of money paid or received at the beginning of every period.

False

Which of the following type of real estate investment is the generally considered the least risky?

Properties net leased to a high quality tenant