Assignment
I. If you purchase a parcel of land today for $25,000, and you expect it to appreciate 10 percent per year in value, how much will your land be worth 10 years from now assuming annual compounding?
II. You are considering the purchase of a small income-producing property for $150,000 that is expected to produce the following net cash flows.
Assume your required internal rate of return on similar investments is 11 percent. What is the net present value of this investment opportunity? What is the going-in internal rate of return on this investment? Should you make the investment?
III. An investor has projected three possible scenarios for a project as follows:
Pessimistic-NOI will be $200,000 the first year, and then decrease 2 percent per year over a five-year holding period. The property will sell for $1.8 million after five years.
Most likely-NOI will be level at $200,000 per year for the next five years (level NOI) and the property will sell for $2 million.
Optimistic-NOI will be $200,000 the first year and increase 3 percent per year over a five-year holding period. The property will then sell for $2.2 million.
The asking price for the property is $2 million. The investor thinks there is about a 30 percent probability for the pessimistic scenario, a 40 percent probability for the most likely scenario, and a 30 percent probability for the optimistic scenario.