An investor purchases a plot of land for £400,000 and intends to construct a building which will be leased out as office space. Construction will start in 6 months' time and will last 18 months. Construction costs will be incurred continuously at a rate of £600,000 per annum. The investor will be able to lease out the building immediately after construction ends. Rental income will be received continuously for 20 years, starting at £100,000 per annum in the first year, £150,000 in the second year, £200,000 in the third year and thereafter increasing by 5% every 12 months. Maintenance costs will be incurred (during those 20 years) half-yearly in arrears, starting at £5,000 for the first half-year and increasing by 2% every half-year. After renting out the building for 20 years, the investor expects to sell the land and building for £800,000. Calculate the net present value of the project at an effective rate of interest of 10% per annum.
An investor purchases a plot of land for £400,000 and intends to construct a building which will be leased out as office space. Construction will start in 6 months' time and will last 18 months. Construction costs will be incurred continuously at a rate of £600,000 per annum. The investor will be able to lease out the building immediately after construction ends. Rental income will be received continuously for 20 years, starting at £100,000 per annum in the first year, £150,000 in the second year, £200,000 in the third year and thereafter increasing by 5% every 12 months. Maintenance costs will be incurred (during those 20 years) half-yearly in arrears, starting at £5,000 for the first half-year and increasing by 2% every half-year. After renting out the building for 20 years, the investor expects to sell the land and building for £800,000. Calculate the net present value of the project at an effective rate of interest of 10% per annum.
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 7MC: Using the information provided, what transaction represents the best application of the present...
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Question
An investor purchases a plot of land for £400,000 and intends to construct a building
which will be leased out as office space.
Construction will start in 6 months' time and will last 18 months. Construction costs
will be incurred continuously at a rate of £600,000 per annum.
The investor will be able to lease out the building immediately after construction
ends. Rental income will be received continuously for 20 years, starting at £100,000
per annum in the first year, £150,000 in the second year, £200,000 in the third year
and thereafter increasing by 5% every 12 months. Maintenance costs will be incurred
(during those 20 years) half-yearly in arrears, starting at £5,000 for the first half-year
and increasing by 2% every half-year.
After renting out the building for 20 years, the investor expects to sell the land and
building for £800,000.
Calculate the net present value of the project at an effective rate of interest of 10%
per annum.
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