Bill is assessing an investment in one of two studio apartments in Sydney’s Potts Point as rental properties for a 3-year time frame. Each property requires an initial outlay of $200,000 and would be sold at the end of 3 years. Bill expects that at this time he could sell property A for $300,000 and property B for $280,000. He also anticipates an increase in net rental income each year for each property. Property B is older but because of its excellent location he expects to achieve a higher net rental even though its expected sales price is likely to be a bit lower than property B. If Bill did not want to invest in either of the two properties then he would invest the $200,000 in a managed fund of equivalent risk which is expected to pay a rate of return of 7% p.a. The expected net income flows for both properties is shown below: Year 1 Year 2 Year 3 Property A $10,000 $10,250 $10,500 Property B $11,000 $11,500 $12,000 a. Calculate the Present Value (PV) of each of the two properties to assist Bill with his decision. b. Based on the PV analysis which property, if any, should Bill buy? c. Indicate the assumptions on which PV is based that may, in fact, even lead Bill to an investment decision that may be incorrect.
Mortgages
A mortgage is a formal agreement in which a bank or other financial institution lends cash at interest in return for assuming the title to the debtor's property, on the condition that the obligation is paid in full.
Mortgage
The term "mortgage" is a type of loan that a borrower takes to maintain his house or any form of assets and he agrees to return the amount in a particular period of time to the lender usually in a series of regular equally monthly, quarterly, or half-yearly payments.
Bill is assessing an investment in one of two studio apartments in Sydney’s Potts Point as rental properties for a 3-year time frame.
Each property requires an initial outlay of $200,000 and would be sold at the end of 3 years. Bill expects that at this time he could sell property A for $300,000 and property B for $280,000. He also anticipates an increase in net rental income each year for each property. Property B is older but because of its excellent location he expects to achieve a higher net rental even though its expected sales price is likely to be a bit lower than property B.
If Bill did not want to invest in either of the two properties then he would invest the $200,000 in a managed fund of equivalent risk which is expected to pay a
The expected net income flows for both properties is shown below:
|
Year 1 |
Year 2 |
Year 3 |
|
|
Property A |
$10,000 |
$10,250 |
$10,500 |
|
Property B |
$11,000 |
$11,500 |
$12,000 |
a. Calculate the Present Value (PV) of each of the two properties to assist Bill with his decision.
b. Based on the PV analysis which property, if any, should Bill buy?
c. Indicate the assumptions on which PV is based that may, in fact, even lead Bill to an investment decision that may be incorrect.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
