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You come across an old warehouse property for sale and want to determine whether it’s a good investment
You come across an old warehouse property for sale and want to determine whether it’s a good investment. The asking price is $1.4 million but you think it will need another $250,000 in improvements to make it competitive.
After careful analysis you determine that the stabilized Net Operating Income for the property (once renovated) will be $170,000 per year. Your research reveals that the market capitalization rate for this type of property (also after renovation) is 8.50%.
(a). Find the Simple Profit (Net Present Value) for this investment by creating a complete Direct Capitalization Analysis (as seen in lecture) in Microsoft Excel.Among other items, be sure to include:
- Market Net Income Multiplier
- Stabilized Value
- Total Project Cost
- Simple Profit (Net Present Value)
(b). Calculate the Project Return Metrics (as shown in lecture) in Excel , be sure to include the Project Capitalization Rate and Project Net Income Multiplier.
Expert Solution
Answer:
(A)
SIMPLE PROFIT (NPV)
TOTAL PRESENT VALUE = (ANNUAL INCOEM / CAPITALIZATION RATE) * 100
= ( $170000 / 8.5 ) * 100 = $2000000
PROJECT COST = $1400000 + $250000 = $1650000
SIMPLE PROFIT (NPV) = TOTAL PRESENT VALUE - TOTAL PROJECT COST = $2000000 - $1650000 = $350000
(B)
PROJECT RETURN METRIC (INTERNAL RATE OF RETURN)
= (ANNUAL INCOME / PROJECT COST) * 100
= ($170000 / $1650000) * 100 = 10.30%
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