Chapter 14 real estate

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

Anderson Realty Trust is considering an apartment property investment that is expected to produce $500,000 in net cash flow at the end of each year for the coming three years. The investment requires a current down payment of $1,000,000. Assume the investor's required rate of return is 9%. What is the NPV of this investment? (Round to the nearest cent)

$265,647.33

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

You want to buy a new sports car 5 years from now, and you plan to save $5,800 per year, beginning one year from today. You will deposit your savings in an account that pays 6% interest. How much will you have just after you make the 5th deposit, 5 years from now?

$32,695

Assuming a 7% discount rate, the present value of the right to receive $10,000 at the end of 10 years is Blank______. If you must wait until the end of year 11 to receive the $10,000, the present value decreases by Blank______.

$5,083.49, $332.56

Linda is developing an apartment building in New York City that she expects to own for 10 years. She requires an 18% IRR on such an investment. The current 10-year Treasury bond (T-bond) yield is 4%. What is the required risk premium on Linda's investment?

14%

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 the S&P 500 Index every year since the end of 1928. It would have grown into $ ________ by the end of 2014 (Round your answer to the nearest cent.)

36,278.66

Which of the following characteristics describe(s) the type of properties that are the focus of the quarterly RERC survey?

Market values greater than $10 million Relatively new

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

True or false: All else the same, a change in the discount rate affects the present value of a 15-year loan more than a 30-year loan.

false

The "total" yield on an investment opportunity

is equal to current yield plus the appreciation yield

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.

total yield

Which of the following type of real estate investment is typically considered the most risky?

"Raw" land held for development

Jeff is about to retire, and he wants to buy an annuity that will provide him with $90,000 of income a year for 20 years, with the first payment coming at the end of the first year. The going rate on such annuities is 6 percent. How much would it cost him to buy the annuity today?

$1,032,293

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

You just inherited some money, and a broker offers to sell you an annuity that pays $5,200 at the beginning of each year for 20 years. You could earn 5.5 percent on your money in other investments with equal risk. What is the most you should pay for the annuity today?

$65,560

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

An apartment requires an initial investment of $200,000 has a projected net income of $15,000 per year for five years. Its projected net sales price after five years is $300,000. Considering its risk, you require a 14% annual return on investments of this type/risk. What is the NPV of this project?

$7,306.81

What is the present value of an apartment building that generates an after-tax cash flow of $30,000 in year one, $32,000 in year two, $35,000 in year three, $20,000 in year four, and $21,000 in year five? Assume that the discount rate is 16%. (round to the nearest cent)

$93,110.50

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%

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%

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

PMT register

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

Properties net leased to a high quality tenant

According to the RERC data displayed in Exhibit 14-2, mean required rates of return on high quality real estate investments

have been trending downward since 2009

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