Your investment rule is to only buy triple net lease properties that offer a positive NPV...
Your investment rule is to only buy triple net lease properties that offer a positive NPV when the net operating income and sale of property is discounted back to the present at a 15% cost of capital. In other words, the discount rate you use in your calculations is 15%. Assume that you will pay the asking price. Your investment horizon is 15 years. At the end of 15 years you expect to sell the property for 30% more than you paid. Ignore taxes on capital gains.
The price is $2 million. NOI is $400,000 per year for 15 years. You should invest in the following property?
True/False
Homework Answers
TRUE
We compute the NPV for this purpose using excel NPV function
| Year | Cost of property | NOI | Net cash flows |
| 0 | -2000000 | -2000000 | |
| 1 | 400000 | 400000 | |
| 2 | 400000 | 400000 | |
| 3 | 400000 | 400000 | |
| 4 | 400000 | 400000 | |
| 5 | 400000 | 400000 | |
| 6 | 400000 | 400000 | |
| 7 | 400000 | 400000 | |
| 8 | 400000 | 400000 | |
| 9 | 400000 | 400000 | |
| 10 | 400000 | 400000 | |
| 11 | 400000 | 400000 | |
| 12 | 400000 | 400000 | |
| 13 | 400000 | 400000 | |
| 14 | 400000 | 400000 | |
| 15 | 2600000 | 400000 | 3000000 |
| NPV | 658473.701 |
Since the NPV is positive, we should invest in the property
WORKINGS
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Your investment rule is to only buy triple net lease properties
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Ann’s loan has a 5/4/3/2/1 prepayment penalty structure, so if
she prepays in the first year, she will pay a penalty equal to 5%
of the balance, in the second year she will pay a penalty equal to
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