The question I have below was already replied to, but partially or incorrectly, and the calculations weren't clear to understand. This is the reason I am posting again:
You are an investor with 12 million cash to invest. You wish to purchase an office building with this cash. You have a choice between three identical office buildings that are located in different areas of the same city. The following information is available regarding the three possible investments:
Building 1
Distance from the CBD (km): 5
Floor space (square meters): 1,500
Asking price (GBP): 12,000,000
Management costs (GBP per square meter per month): 5
Building 2
Distance from the CBD (km): 10
Floor space (square meters): 2,000
Asking price (GBP): 11,000,000
Management costs (GBP per square meter per month): 10
Building 3
Distance from the CBD (km): 1,000
Floor space (square meters): 8,000,000
Asking price (GBP): 15
1. Commercial rent in the central business district (CBD) is £60 per square meter per month and decreases cumulatively by 5% for each kilometer located away from the CBD. Tip: Cumulatively means that if the building is located 2 kilometers away from the CBD, rent decreases by 5% for the first kilometer (which gives you £57), and by another 5% on £57 on the second kilometer, which gives you £54.
2. Building 2 has been certified as complying with sustainability standards.
3. A suitable discount rate for all areas is 6%.
4. There is a fountain outside Building 1 that you can persuade the local government to renovate by the time you purchase the property.
5. The local government will impose a 2% tax, by the time you complete the purchase of the property, on the sale of all properties that are not certified as compliant with sustainability standards. Ignore the effects of any other taxes.
Question 1
1.1 Calculate the net present value and internal rate of return of each building assuming that net operating income will be received in perpetuity. Round your calculated net present value to the nearest pound and your calculated internal rate of return to two decimal places.
(15 marks)
