A developer plans to start construction of a building in one...

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. Required: What is the value of the land at the end of the year in both possible scenarios? How much should the developer be willing to pay for the land?

Transcript

00:01 Let's have a look on the question.

00:03 So, here in the question it is mentioned to us that the person will start the building in the first year if the rent levels make construction feasible.

00:11 So, in that case, in that year the cost of construction will be this much.

00:15 Now, our motive is the maximum price, the maximum price would be that makes, that makes the nbp 0 which is the present value of cash flow, value of cash flow.

00:51 So, basically the maximum price would be the, would be that makes nbp 0 and nbp that is the present value of cash flow.

00:59 Now, the current cash flows are, current cash flows.

01:06 So, for year 1 we have this is equal to construction of building, construction of building minus, minus this amount.

01:23 Now, year 2 will be equal to, for year 2 this is equal to we get noi, we get noi.

01:32 Now, here first we need to find out the expected noi.

01:36 So, expected noi will be equal to as mentioned in the question that we can take the data from there that is multiplied by 25 percent plus multiplied by 70 percent.

01:54 So, when we calculate this we will get this value is equal to 19250 in year 2.

02:02 So, this will be the cost in year 2.

02:05 This is the current cash flow for year 2.

02:08 Now, moving on we need to find out it is given to us that noi is perpetual and increasing by 1 percent.

02:15 Noi is perpetual and increasing by 1 percent...

Question

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