Question

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 10% cost of capital. In other words, the discount rate you use in your calculations is 10%. 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 $5 million. NOI is $300,000 per year for 15 years.

You should invest in the following property?

True or False

Answer 1

Price of property = $5 million

It is stated that the property can be sold for 30% more than the amount paid for it.

Sale price = $5 million + ($5 million * 0.30) = $5 million + $1.5 million = $6.5 million

The sale price of the property would be $6.5 million.

Net operating income = $300,000

Time period = 15 years

Discount rate = 10%

Calculate the NPV -

NPV = - price of property + NOI (P/A, i, n) + Sale price (P/F, i, n)

NPV = -$5 million + $300,000(P/A, 10%, 15) + $6.5 million (P/F, 10%, 15)

NPV = -$5,000,000 + ($300,000 * 7.6061) + ($6,500,000 * 0.2394)

NPV = -$5,000,000 + $2,281,830 + $1,556,100

NPV = -$1,162,070

The NPV of the property is -$1,162,070

The NPV is negative.

So,

The person should not invest in this property.

The given statement is False.