Meston Place is an office building that has recently been put up for sale. It is rented by one tenant who has ten years remaining on their lease. The rent for years 1-3 has been fixed at ¢300,000 per annum, the rent for years 4-6 is fixed at ¢420,000 per annum and the rent for years 7-10 has been fixed at ¢510,000 per annum. The rent is payable annually and in arrears. When the lease ends, it is forecast that the property will sell for ¢2 million. The property is currently being advertised for ¢2.7 million and the landlord has already paid an advertisement cost of ¢500,000. The risk on investment of this kind is currently 12%.
(a) Calculate the payback of the investment and comment on your results. (5 marks)
(b) Calculate the NPV of the investment and comment on your results. (5 marks)
(c) Calculate the IRR of the investment and comment on your results. (5 marks)
(d) Your client, Mr. Yeboah, has approached you that he wants to purchase Meston Place and anticipates that he can use 5 years to recoup his investment. Prior to approaching you, Mr Yeboah had already paid ¢200,000 to another real estate agent as consultancy fee. Based on your calculations in a), b) and c), do you recommend that he buys the property? (5 marks)
(e) What name is given to the ¢200,000 already paid by Yeboah and how is it treated in analysing cash flows?

Answer rating: 100% (QA)

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