The Value Of Real Estate

What is the net present value of this follow-up investment and the combined base and expansion investments?

Depreciation Schedule Year 0 1 2 3 4 5 6 7 8 9 10 Building 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 Equip 142857.1429 142857.1 142857.1 142857.1 142857.1 142857.1 142857.1 0 0 0 Dep Exp 152857.1429 152857.1 152857.1 152857.1 152857.1 152857.1 152857.1 10000 10000 10000 Tax Credit 42800 42800 42800 42800 42800 42800 42800 2800 2800 2800

| In Year 1, depreciation is $5,000 plus 15% of the asset’s outlayFrom Year 2, depreciation is either * 30% of the asset’s book value; or * if the asset’s book value is less than $6,500, depreciation is the asset’s book value (i.e. asset is depreciated to zero once book value < $6,500)

Depreciation is the loss in value of an asset / building over time due to wear and tear, physical deterioration and age. Depreciation is treated as an expense and is a line item on your income statement but must be applied only to the building and not the land (since land does not wear out over time). You will be able to depreciate the building over a period of 39 years using the Modified Accelerated Cost Recovery System (MACRS). IRS Publication 946 contains the rules and guidelines governing depreciation of non-residential or commercial property.

2. Architect paid $250K and has completed an unknown, but small amount of renovation work so far. He has not invested anywhere near $150K into renovations

The type of depreciation method the Target Corporation uses is a straight-line method. Property and equipment is depreciated using the straight-line method over estimated useful lives or lease terms if shorter. “Target amortizes leasehold improvements purchased after the beginning of the initial lease term over the shorter of the assets' useful lives or a term that includes the original lease term, plus any renewals that are reasonably assured at the date the leasehold improvements are acquired” (Stock Analysis, n.d.).

It should be noted that an income approach could have also been used. Using a determined market discount rate of 6% and current year revenue of $3,028,000 at a four year discounted rate, the value would have been $12,040,548. Because adequate market information was available to make a more accurate estimate of the fair value, this is the estimate that was chosen.

The last approach to valuation is the income approach. This is the dominant approach when determining the value of an income-producing which this will be. This approach determines value by the expected future cash flows. The following is the income approach to valuation:

A property’s highest and best use is defined as “A principle of appraisal and assessment requiring that each property be appraised as though it were being put to its most profitable use (highest possible present net worth), given probable legal, physical, and financial constraints. The principle entails first identifying the most appropriate market, and, second, the most profitable use within that market. The concept is most commonly discussed in connection with underutilized

There are three primary routes to establishing a real estate property values and these methods differ significantly. The most common for residential real estate is the determination of market value or the sales comparison approach. This method utilizes sales data to determine what other similar properties in the local market have sold for. Another method of determining value is through a cost approach which is more typical in new construction. For example, when a contractor builds a new house or structure they might charge for the materials and labor that was used plus some amount of

We evaluated our three options by considering depreciation over 20 years, taxable income, income taxes, and after tax cash flow. Determining a before tax cash flow was incredibly difficult, therefore we used the cost of each option for 42 homes.

At the time of preparation of this syllabus, the final exam date is unknown. You will

The actual production would begin in the third quarter of this year, therefore only half year’s depreciation should be counted on Equipment and IT communication in 2004 (According to Appendix A). The following years (2005-2008) incremental cash flows are computed by the same method. However as the IT equipment and furnishings would be depreciated on a straight line basis over 3 years, thus in year four (2007), there would be only half a year’s deprecation left and after that it will be used up. The last year’s net cash flow in 2009 should be included the extra terminal Value on that year, which includes 24 years’ residual value on building and one year and a half residual value on equipment totaled $2,990,412 with two assumptions of by using residual book values for the building and operating equipment and there will be no further NWS advantage after year 2009. Finally, by obtaining 6 years’ incremental cash-flows and discounting them back to time zero (with the estimate rate of return by 15%) lessing initial cost to get an appealing NPV of $1190528 (Luehrman, p. 3).

Now the basis for all future transactions relating to this building would also be at its cost, i.e. $12 million. For example: The depreciation would be charged on $12 million and not on $15 million. Similarly when the asset is sold in future, the profit or loss on sale would be based on the cost price actually paid for it. Since the original or

period (based on operating schedules and budgets) in terms of materials used, labor cost, and overhead cost, and then determining how much of this production, if any, was used to build up