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Armor Investment Company is considering the acquisition of a heavily depreciated building on 10 acres...

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Accounting

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Armor Investment Company is considering the acquisition of a heavily depreciated building on 10 acres of land. It expects to rent the building as a storage facility and expects to collect cash flows equal to $100,000 next year. However, because depreciation is expected to increase, Armor expects cash flows to decline at a rate of 4 percent per year indefinitely. Armor expects to earn an IRR on investment return (r) at 13 percent. Required: a. What is the value of this property? b. Assume that after five years the building could be demolished and the land could be redeveloped with a strip retail improvement. The latter would produce NO/ of $200,000 per year, grow at 3 percent per year, and cost $1 million to build. Investors currently earn a 1 percent IRR on such investments. What is the profit to be eamed? Ps: apply a cap rate of 0.07%

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