You are an investor with 12 million cash to invest. You wish to purchase an office...

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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: Distance from the CBD (km) Floor space (square metres) Asking price (GBP) Management costs (GBP per square metre per month) Building 1 Building 2 Building 3 0 5 1,000 1,500 10 2,000 8,000,000 12,000,000 11,000,000 15 5 10 1. 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, if 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 57 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%. 4. 5. There is a fountain outside Building 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%. 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 2 2.1 Interest rate on loan Loan to value Borrowed amount Annual net operating income Annual interest expense Annual geared net operating income Present value of annual geared net operating income Initial investment Net present value Internal rate of return Start writing here: 4.00% 4.00% 50% 50% 4.00% 50% 2.2 Interest rate on loan Loan to value Borrowed amount Annual net operating income Annual interest expense Annual geared net operating income Present value of annual geared net operating income Initial investment Net present value Internal rate of return 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) 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 buildings in different parts of the city as they want to diversify their risk portfolio. Therefore, banks are willing to offer you different loan prices for the different buildings as follows: Building 1: Building 2: Building 3: 6.65% 5.32% 3.92% Calculate the internal rate of return and net present value of each building assuming that net operating income will be received in perpetuity, and the discount rate of 6% is still applicable. Round your calculated net present value to the nearest pound and your calculated internal rate of return to two decimal places. (Answer the questions in the corresponding area of the Answer sheet) (4 marks) 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: Distance from the CBD (km) Floor space (square metres) Asking price (GBP) Management costs (GBP per square metre per month) Building 1 Building 2 Building 3 0 5 1,000 1,500 10 2,000 8,000,000 12,000,000 11,000,000 15 5 10 1. 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, if 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 57 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%. 4. 5. There is a fountain outside Building 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%. 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 2 2.1 Interest rate on loan Loan to value Borrowed amount Annual net operating income Annual interest expense Annual geared net operating income Present value of annual geared net operating income Initial investment Net present value Internal rate of return Start writing here: 4.00% 4.00% 50% 50% 4.00% 50% 2.2 Interest rate on loan Loan to value Borrowed amount Annual net operating income Annual interest expense Annual geared net operating income Present value of annual geared net operating income Initial investment Net present value Internal rate of return 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) 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 buildings in different parts of the city as they want to diversify their risk portfolio. Therefore, banks are willing to offer you different loan prices for the different buildings as follows: Building 1: Building 2: Building 3: 6.65% 5.32% 3.92% Calculate the internal rate of return and net present value of each building assuming that net operating income will be received in perpetuity, and the discount rate of 6% is still applicable. Round your calculated net present value to the nearest pound and your calculated internal rate of return to two decimal places. (Answer the questions in the corresponding area of the Answer sheet) (4 marks)