Question: Ron Flessner is interested in purchasing the Wesleyan Motel in central Illinois. He desires an 18% return on his investment and can borrow any funds requried for the purchase at an annual interest rate of 10%. Assume that the mortgage constant would be 10.8% and that he would borrow 80% of the market value of the property. His consultants have indicated the income stream for the desired property for the next 7 years is as follows:
Year: 1 Income Stream: $1,100,000; Year 2 Income Stream 1,050,000; Year 3 Income Stream: 1,000,000; Year 4 Income Stream: 930,000; Year 5 Income Stream: 850,000; Year 6 Income Stream: 750,000; Year 7 income stream: 600,000; Expected sales values at end of yr 7: 800,000.
1. Determine the market value of the Wesleyan Motel by discounting the income stream over its investment life. Assuming he can borrow only 70% of the purchase price, calculate the market value based on the above. Independent of last sentence, assume a financial institution would lend funds at 9% (mortgage constant of 9.7%). Holding everything else the same, calculate the estimated market value.