Ch14

The purchase price of an income-producing property today is $570,000. After analysis of the expected future cash flows, expected sales price, and expected yield, the investor determines that the future cash flows have a present value (PV) of $580,000. Taking into consideration the price of the property today, what is the net present value (NPV) of this investment opportunity, and should the investor take the deal?

$10,000; Yes

Assume that an individual puts $10,000 into a savings account that pays 3% interest, with interest being compounded monthly. The individual plans to withdraw the balance in five years to buy a car. If he does not make any further deposits over this period, how much will the individual be able to put towards his purchase?

$11,616.17 N=5*12 I=.3/12 PV=10,000 PMT=0 PV = 11,616.17 10,000(1+(.03/12))^60

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 twenty years, how much will the land be worth twenty years from now?

$132,664.89

Suppose you are starting a PhD program with only $1,000 in your savings account. The university has agreed to waive your tuition, cover all of your living expenses, and pay you an additional stipend of $2,000 at the beginning of each month, as long as you teach one course per semester over the course of five years. If your savings account is able to earn 5.5% per year for the five years that you will be in this program, how much will you have accumulated in your savings account by the end of the program if interest is compounded on a monthly basis?

$139,708.76

Upon starting his first job after graduation, Jon has completed the necessary paperwork to set up direct deposit of his paycheck into his savings account. After taxes, medical benefits, and retirement account contributions have been taken out of John's gross salary, he is left with a direct deposit of $4,000 at the end of each month. If John started with no other savings in his account, how much will John have in his savings account at the end of 12 months if he is able to earn an annual interest rate of 3%, with interest being compounded monthly?

$48, 665.53

Assuming that an investor requires a 10% annual yield over the next twelve years, how much would she be willing to pay for the right to receive $20,000 at the end of year 12?

$6,372.62 20,000/(1.10)^12 or N=12 I=10 PV=6372.62 PMT=0 FV=20000

Suppose you own a house that you are renting out to a group of college students for the 10-month academic year. You are charging $1,000 per month in rent. You will collect the first rent payment today and then on the first of the month each month thereafter. What is the value of this investment opportunity to you today if you could reinvest your income at an annualized rate of 6%?

$9,779.06

Suppose an investor is interested in purchasing the following income-producing property at a current market 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. Assuming that the required rate of return is 12% and the estimated proceeds from selling the property at the end of year 4 is $500,000, what is the NPV of the project?

$9,889.56

Suppose an investor is interested in purchasing the following income-producing property at a current market price of $2,500,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: year 1 = $100,000; year 2 = $150,000; year 3 = $200,000; year 4 = $250,000. If the estimated proceeds from selling the property at the end of year 4 is $3,000,000, what is the internal rate of return (IRR) of the project?

10.99%

Suppose that a landlord is interested in renting out a two-bedroom apartment for $1,000 a month for the next year. The landlord requires rent to be paid at the beginning of the month, at which point he will deposit the rental check into a local savings account. If the annual interest that the tenant can earn on this account is 5% and interest is compounded monthly, how much will the tenant have in his savings account at the end of the year?

12,330.01 N=12 I=5/12 PV=0 PMT=1000 FV=12,278.85 Annuity due=12,278.85(1+(.05/12))=12,330.01

Assume that 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. Calculate the internal rate of return (IRR) for this transaction.

6.78%

An investor originally paid $22,000 for a vacant lot twelve years ago. If the investor is able to sell the lot today for $62,000, what would his annual rate of return be on this investment (rounded to the nearest percent)?

9%

Suppose that an industrial building can be purchased today for $2,500,000. If it is expected to produce cash flows of $180,000 for each of the next five years (assume CFs are received at the end of each year) and can be sold at the end of the fifth year for $2,800,000, what is the internal rate of return (IRR) on this investment?

9.19

The internal rate of return (IRR) and the net present value (NPV) are tools that are widely used in real estate investment and finance decision making. An investor would most likely pursue an investment if which of the following circumstances was true?

The going-in IRR exceeds the investor's required rate of return.

The Real Estate Research Corporation (RERC) regularly surveys a sample of institutional investors and managers in order to gain insight into the required returns and risk adjustments used by industry professionals when making real estate acquisitions. Most of the properties that RERC examines are large, relatively new, located in major metropolitan areas, and fully or substantially leased. These classifications of properties are commonly referred to as

investment grade properties.