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23 September, 16:26

3. A property that produces a first year NOI of $80,000 is purchased for $750,000. The NOI is expected to increase by 15% in the sixth year when some of the leases turnover. The resale price in year 10 is expected to be $830,000. What is the net present value of the property based on the 10-year holding period and a discount rate of 9.5%? (D)

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  1. 23 September, 17:21
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    Net Present Value (NPV) = $ 115,998

    Explanation:

    Calculation of the Net Present Value

    Net Present Value = Cash Inflows - Cash Outflows

    NOI from 6th year = 80,000*115% = 92,000

    NPV = 80000 (PVAF, 5 year) + 92,000 (PVAF, (105), 9.5%) + 830,000 / (1.095) 10 - 750,000

    NPV = (80,000 x 3.839) + (92,000 x 2.439) + (830,000 x 0.403) - 750,000

    = 307,120 + 224,388 + 334,490 - 750,000

    The Net Present Value will be $ 115998
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