Ramzy inherited $5 million from her favorite uncle. Being a studious real estate
ID: 2645147 • Letter: R
Question
Ramzy inherited $5 million from her favorite uncle. Being a studious real estate student she feels that she should invest a portion of her inheritance in real estate; that is, after she comes back from her world cruise. She is considering a small office building that is being offered for $1.6 million. The net operating income is as follows:
Year 1 $175,000, Year 2, $185,000, Year 3, $150,000, Year 4, $165,000, Year 5, $170,000, Year 6, $185,000. Year 7, $195,000. She plans to sell it at the end of year seven base on year eight
Explanation / Answer
Answer
Since the total of cash flows for 7 years would amount to $1.225 Million and Trminal value of $215,000 + 10% of above $122,500 = $337,500 a total of 1.5625 Mill will be the value at year 7
As a percentage 78.4 % coming from cash flows and 21.6 % coming from Terminal value
Year
Free Cash flows
Terminal Value
Total
1
175000
175000
2
185000
185000
3
150000
150000
4
165000
165000
5
170000
170000
6
185000
185000
7
195000
195000
8
215000
122500
337500
Terminal Value = cf year 8 +10% of CF 1-7
Grand Total
1562500
Year
Free Cash flows
Terminal Value
Total
1
175000
175000
2
185000
185000
3
150000
150000
4
165000
165000
5
170000
170000
6
185000
185000
7
195000
195000
8
215000
122500
337500
Terminal Value = cf year 8 +10% of CF 1-7
Grand Total
1562500
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.