An investor is considering the purchase of a small apartment. The NOI is expected to be the following: Year 1, $214,000; Year 2, $224,000; Year 3, $234,000; Year 4, $244,000; Year 5, $254,000. The property will be sold at the end of year 5 and the investor believes that the property value should have appreciated at a rate of 3 percent per year during the five-year period. The investor plans to pay all cash for the property and wants to earn a 10 percent return on investment (IRR) compounded annually.
Required:
a. What should be the property value (REV) at the end of year 5 in order for the investor to earn the 10% IRR?
b. What should be the present value of the property today?
c. Based on your answer in (b), if the building could be reproduced for $2,440,000 today, what would be the underlying value of the land?
