An investor purchases a plot of land for £400,000 and intends to construct a building which will be leased out as office space.

Construction will start in 6 months' time and will last 18 months. Construction costs will be incurred continuously at a rate of £600,000 per annum.

The investor will be able to lease out the building immediately after construction ends. Rental income will be received continuously for 20 years, starting at £100,000 per annum in the first year, £150,000 in the second year, £200,000 in the third year and thereafter increasing by 5% every 12 months. Maintenance costs will be incurred (during those 20 years) half-yearly in arrears, starting at £5,000 for the first half-year
and increasing by 2% every half-year.

After renting out the building for 20 years, the investor expects to sell the land and building for £800,000.

Calculate the net present value of the project at an effective rate of interest of 10% per annum.

Answer rating: 100% (QA)

Step 1 400000 is incurred in the year 0 Also construction will start i... View the full answer