# Step by step solution needed for the question and with the answer thanks ☺ An investor purchased, for an initial cost o...

Step by step solution needed for the question and with the answer thanks ☺

An investor purchased, for an initial cost of £9.5 million, an office block to be rented out to other businesses. The investor spent a further £2 million on renovating the building three months after purchase An agreement has been made with the tenant who will start using the office block exactly half a year after the purchase date. The tenant will pay rent to the investor for ten years and will then immediately purchase the building from the company for £15.5 million. The first year's rent has been set at £760,000 per annum payable half-yearly in advance. The agreement states that, at the start of every second year (from the start of the rental period), the annual rent will increase by a rate of 5.5% per annum on a compound basis Assuming that rental income is received as expected and the company makes a rate of return of 8% per annum on the investment, calculate the investor's present value of the proceeds, in millions, from this project at the time of purchase. (Total 14 marks]

 Present Value (PV) of Cash Flow: (Cash flow)/((1+i)^N) i=discount rate=Rate of return =8%=0.08 N=Year of Cash flow N CF PV=CF/(1.08^N) Year Cash Flow CALCULATIONS Present Value Initial Cash Flow at year 0 0 -£   9,500,000 -£       9,500,000 Cash flow at year 0.25(after 3 months) 0.25 -£   2,000,000 -£       1,961,887 First half yearly rent in advance 0.5 £        380,000 (760000/2) £            365,655 2nd installment of first year rent 1 £        380,000 £            351,852 First installment of second year rent 1.5 £        380,000 £            338,570 2nd installment of second year rent 2 £        380,000 £            325,789 First installment of third year rent 2.5 £        400,900 (760000*1.055)/2 £            330,732 2nd installment of third year rent 3 £        400,900 £            318,247 First installment of fourth year rent 3.5 £        400,900 £            306,234 2nd installment of fourth year rent 4 £        400,900 £            294,673 First installment of fifth year rent 4.5 £        422,950 (400900*1.055) £            299,145 2nd installment of fifth year rent 5 £        422,950 £            287,852 First installment of sixth year rent 5.5 £        422,950 £            276,986 2nd installment of sixth year rent 6 £        422,950 £            266,530 First installment of Seventh year rent 6.5 £        446,212 (422950*1.055) £            270,574 2nd installment of Seventh year rent 7 £        446,212 £            260,360 First installment of eighth year rent 7.5 £        446,212 £            250,532 2nd installment of eighth year rent 8 £        446,212 £            241,074 First installment of ninth year rent 8.5 £        470,753 (446212*1.055) £            244,732 2nd installment of ninth year rent 9 £        470,753 £            235,494 First installment of tenth year rent 9.5 £        470,753 £            226,604 2nd installment of tenth year rent 10 £        470,753 £            218,050 Cash Flow from Sale of the building 10 £ 15,500,000 £        7,179,499 SUM £        1,427,298 Net Present value of proceeds £          1,427,298 Net Present value of proceeds £                     1.43 million
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