Question

PLEASE ANSWER IN EXCEL WITH CALCULATIONS. 

A Developer plans to start construction of a building in one year if at that point rent levels make construction feasible. At that time the building will cost 1,000,000 to construct. During the first year after construction would take place, there is a 60 percent chance that NOI will be 150,000 and a 40 percent chance that the NOI will be 75,000. In either case, NOI would be expected to increase at 2 percent per year after the first year. How much should the developer be willing to pay for the land if he wants a 12 percent rate of return?

Answer 1

0 $ (1,000,000) Construction Cost   

1 $ 120,000 Rent   

  

Rent g 2%

Yield 12%

  

Present Value of Cash flows $ 1,200,000   

Maximum price to be paid for land assuming 12% yield $ 200,000