A real estate investor owns a small office building she has leased to a major insurance...

A real estate investor owns a small office building she has leased to a major insurance company for a rental fee based on a share of the profits. If the insurance company is successful, the present value of future rentals is estimated at $15 million. If the insurance company is not successful, the present value of the rentals will be $2 million. The insurance company has offered the investor $6 million to buy the property outright. On an expected monetary value basis, what probability would need to be assigned to “success” for the investor to be indifferent between selling and not selling?

Expert Solution

Let the probability of success =P(x); So, the probability of failure =1 - P(x); Expected monetary value =EMV

EMV =P(x)*15 million + (1 - P(x))*2 million =6 million

P(x)*15 million + 2 million - P(x)*2 million =6 million

P(x)[15 million - 2 million] =4 million

P(x) =4 million/13 million =4/13 =0.3077

Verification:

EMV =P(x)*15 million + (1 - P(x))*2 million =0.3077*15 million + (1 - 0.3077)*2 million =4.6155 million + 1.3846 million =6 million

Thus, the probability that would need to be assigned to “success” for the investor to be indifferent between selling and not selling =0.3077

orchestra answered 2 years ago

A real estate investor has bought an office building valued at $100 million. After a 10%...

A real estate investor has bought an office building valued at $100 million. After a 10% down payment for the property price, the investor has borrowed a one-year mortgage loan at 10% interest rate from Nopay Bank to finance the remaining purchase price. The credit rating of the investor is ABB indicating that his probability of default is 3%. The current market value of the office building is $100 million. The office building is pledged with Nopay Bank as collateral....

1. A real estate investor is considering an investment in a building that will generate profits...

1. A real estate investor is considering an investment in a building that will generate profits of $22,000 at the end of each year for the next 10 years. The investor requires a 22% return on the investment to compensate for the risk they are taking. a. How much should the investor pay today for the investment? b. How much should the investor pay today for the investment if profits at the then end of year 1 are $22,000, and...

Art Neuner, an investor in real estate, bought an office condominium. The market value of the...

Art Neuner, an investor in real estate, bought an office condominium. The market value of the condo was $250,000 with a 70% assessment rate. Art feels that his return should be 12% per month on his investment after all expenses. The tax rate is $31.50 per $1,000. Art estimates it will cost $275 per month to cover general repairs, insurance, and so on. He pays a $140 condo fee per month. All utilities and heat are the responsibility of the...

Clayton Company bought real estate, on which there was an old office building, for $300,000. It...

Clayton Company bought real estate, on which there was an old office building, for $300,000. It paid $50,000 in cash as a down payment and signed a 10% mortgage for the remainder. It immediately had the old building razed at a net cost of $35,000. Attorneys were paid $6,000 in connection with the land purchase and an additional $3,000 in connection with permits and zoning variances necessary for Patton's new office building. $20,000 was paid for excavation for the basement...

An investor into the real estate mentioned to you that he/she wishes to purchase a property...

An investor into the real estate mentioned to you that he/she wishes to purchase a property for investment upon his/her graduation in about 3 years time. The property value he/she can afford are in the range of rm300,000. Evaluate the above in the perspective of time value of money.

4. An investor into the real estate mentioned to you that he/she wishes to purchase a...

4. An investor into the real estate mentioned to you that he/she wishes to purchase a property for investment upon his/her graduation in about 3 years time. The property value he/she can afford are in the range of rm300,000. Evaluate the above in the perspective of time value of money. (300 words) Assume based rate=3% BLR=5.85%

Real Estate Office A real estate office using the double-declining-balance method of depreciation purchased office...

Real Estate Office A real estate office using the double-declining-balance method of depreciation purchased office furniture costing $9,000 and put it in use on April 1. The furniture is expected to have a useful life of 10 years and an estimated resale value of $600. Refer to the Real Estate Office scenario. Compute the depreciation expense for April 1 through December 31 of the first tax year and all 12 months of the second and third years.

Kate, a real estate developer, is planning construction of a major office high rise in downtown...

Kate, a real estate developer, is planning construction of a major office high rise in downtown Austin. Her architectural engineering firm suggests she install improved curtain wall with high efficiency windows and seals. Doing so will cost her an additional $3/sf of curtain wall and she expects to have 200,000 sf of exterior wall. If she does so, she will be able to install a smaller mechanical system that will be $400,000 less than the original planed system. The energy...

What are some ethical challenges in real estate and how the professional real estate investor and...

What are some ethical challenges in real estate and how the professional real estate investor and broker should effectively handle those ethical challenges?

Ben Ryatt, professor of languages at a southern university, owns a small office building adjacent to...

Ben Ryatt, professor of languages at a southern university, owns a small office building adjacent to the university campus. He acquired the property 12 years ago at a total cost of $670,000—$62,000 for the land and $608,000 for the building. He has just received an offer from a realty company that wants to purchase the property; however, the property has been a good source of income over the years, so Professor Ryatt is unsure whether he should keep it or...

Question