Exam 14: The Effects of Time and Risk on Value

An investor originally paid $22,000 for a vacant lot 12 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)?

Suppose an investor is interested in purchasing the following income producing property at a current market price of $490,000.The prospective buyer has estimated the expected cash flows over the next four years to be as follows: Year 1 = $48,000,Year 2 = $49,440,Year 3 = $50,923,Year 4 = $52,451.Assuming that the required rate of return is 14% and the estimated proceeds from selling the property at the end of year four is $560,000,what is the NPV of the project?

An investor just purchased an office building for $100,000.He knows for certain that he can sell the building for $110,000 in 5 years.Approximately how much does he need to Charge in annual rent in order to achieve a 15% annual return on the deal (rounded to the nearest hundred dollars)?

Assuming all else the same,the ___________ of an annuity due will be _____________ that of an ordinary annuity.

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 $1000 per month in rent.You will collect the first rent payment today and then on the 1^st of the month each month thereafter.What is the value of this investment opportunity to you today if you could reinvest your income at a rate of 6%?

Suppose an investor deposits $2500 in an interest-bearing account at her local bank.The account pays 2.5% interest compounded annually.If the investor plans on withdrawing the original principal plus accumulated interest at the end of 7 years,what is the total amount that She should expect to receive assuming interest rates do not change?

An investor agreed to sell a warehouse 5 years from now to the tenant who currently rents the space.The tenant will continue to pay $20,000 rent at the end of each year including year five in which he will purchase the building for an additional $150,000.Assuming the investor's required rate of return is 10%,how much is this deal presently worth to the investor who was willing to sell?

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.

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 5 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?

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 20 years from now?

Uncertainty of cash flows can vary significantly across property types.Which of the following property types is often considered to have the most uncertain expected cash flows?

Suppose that a property can generate cash flows of $10,000 per year for eight years and can sell for $80,000 at the end of the investment period.Assuming a discount rate of 10%,what is the present value of this property (Assume end of period cash flows in your calculation)?

Suppose your personal financial goal is to retire with a million dollars in your savings account.How much must you deposit monthly in an account paying 5% a year (with interest being compounded monthly and your deposits occurring at the end of the month),to accumulate $1,000,000 by your 65^th birthday if you begin your deposits on your 22^nd birthday? (Note: Assume that you started with no savings in the account prior to your first deposit at age 22 and you do not make a deposit on your 65^th birthday)

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 rate that is used to discount expected future cash flows can be thought of as the return the investor is forgoing on an alternative investment of equal risk.In this framework,the discount rate is being thought of as which of the following?

A property owner has set up a contract in which he agrees to sell a warehouse 5 years from now to the tenant who currently leases the space.The tenant has agreed to continue to pay $20,000 in rent at the end of each year,including year five,at which time he will purchase the building for an additional $1,500,000.Assuming the required rate of return on a similar investment is 10% (annual),how much is this deal presently worth to the original owner of the property?

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?

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:

Suppose you have found a tenant who wishes to rent out your vacation home for the next twelve months.You are charging $800 per month in rent.You will collect the first rent payment today and then on the 1^st 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 annual rate of 3% with interest compounded on a monthly basis?

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 four is $500,000,what is the NPV of the project?