Arial 10 ' 2 BIU INI $ . ill V V fx B D E F G H J K L M General information 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 Building 2 Building 3 Distance from the CBD (km) 10 Floor space (square metres) 1,000 1,500 2,000 Asking price (GBP) 8,000,000 12,000,000 11,000,000 Management costs (GBP per square metre per month 15. 10 Commercial rent in the central business district (CBD) is 60 per square metre per month and decreases cumulatively by 5% for each kilometre located away from the CBD. Tip: Cumulatively means that, the building is located 2 kilometres away from the CBD, rent decreases by 5% for the first kilometre (which gives you 57), and by another 5% on 7 on the second kilometre, 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% There is a fountain outside Bulding 1 that you can persuade the local government to renovate by the time you purchase the property. Similar renovations to properties in the area have increased the rent charged per square metre by 3% F 4. 5. B 9 0 11 12 3 94 25 The local government will impose a 2% tax, by the time you complete the purchase of the property, on the sale of al properties that are not certified as compliant with sustainability standards. Ignore the effects of any other taxes. Question 1 56.1 Calculate the net present value and internal rate of return of each building assuming that net operating income will be received in perpetuity. 97 Round your calculated net present value to the nearest pound and your calculated internal rate of return to two decimal places. 98 100 (15 marks) 101 1.2 Recommend, based on your calculations in Question 1.1, and purely from a financial perspective, which building to invest in. 102 103 104 (Answer the questions in the corresponding area of the Answer sheet) (1 mark) 105 106 Question 2 107 108 2.1 Would your answer to Question 1.2 change if you were to finance the asking price of each building with a 50% loan-to-value mortgage? The loan bears interest at a rate of 4% and can be rolled over forever. The discount rate of 6% is still applicable. 110 111 (11 marks) 112 113 2.2 Assume, once again, that the asking price of the building is financed with a 50% loan-to-value mortgage. In addition, assume that banks have 114 different preferences for investing into buildings in different parts of the city as they want to diversity the risk portfolio. Therefore, banks are Instructions Answer sheet + 100 Arial = = 10 ' a. Av SA 29 BIU v v v fe D A B Question 1 E F G H J K L M 2.1 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. 1.2 Recommend, based on your calculations in Question 1.1, and purely from a financial perspective, which building to invest in (15 marks) (1 mark) (Answer the questions in the corresponding area of the Answer sheet) Question 2 2.1 Would your answer to Question 1.2 change if you were to finance the asking price of each building with a 50% loan-to-value mortgage? The loan bears interest at a rate of 4% and can be rolled over forever. The discount rate of 6% is still applicable. (11 marks 3 2.2 Assume, once again, that the asking price of the building is financed with a 50% loan-to-value mortgage. In addition, assume that banks have different preferences for investing into buldings in different parts of the city as they want to diversity their risk portfolio. Therefore, banks are willing to offer you different loan prices for the different buildings as follows: 4 5 6 17 18 19 20 21 22 23 24 25 126 127 Buildina 1: 6.65% Buildina 2: 5.32% Building 3: 3.92% Calculate the Internal rate of return and net present value of each building assuming that not operating income will be received in perpetuity, and the discount rate of 6% is still applicable. Round your calculated net papsent value to the nearest pound and your calculated internal rate of return to two decimal naras (4 marks) (Answer the questions in the corresponding area of the Answer sheet) Question 3 128 129 130 131 132 133 134 135 136 137 138 139 In Questions 1 and 2, rent was assumed to be foxed over time. In reality, this is not the case. The growth in rent for each of the three buildings is likely to differ because, even though the buildings are the same, they are in different locations, Assume that the level of rent that each building is currently at is fair market rent. How would you expect rent levels to change in the future? Innretninn ofan aranemine in infiem un near Dose ir newer and (Answer the question in the corresponding area of the Answer sheet) The following rubric will be used to grade your answer in Question 3: Unsatisfactory Limited Accomplished Exceptional Adherence to the brief Answer does not address the Answer does address Answer addresses the Answer addresses all requirements of the question (0) The student chooses one the requirements of the requirements of the the requirements of the question, but important question. Almost al of the three options question. All information parts of the question are Information is provided provided is Instructions Answer sheet + 140 141 142 143