Question

You are considering purchasing a 50,000 rentable sf office building. You project a

      $30.50 full service rental rate (operating expenses are projected to be $8.50 in the first

year). If you project 3% annual rent escalation and 4% annual operating expense escalation and it costs 13,000,000, what is the NPV after 5 years assuming an 8% annual discount rate and a sale at the end of 5 years using an 8% exit cap rate.

Sale expenses are 6% of sales price. Assume a 5% vacancy and bad debt factor and assume no debt – all cash transaction.

Answer 1

Year	0	1	2	3	4	5
Initial Investment	-13000000
Annual Rent	0	50000*30.5*.95 = 1448750	1448750*1.03 = 1492212.5	1536979	1583088	1630580
Operating expense	0	50000*8.5 = 425000	425000*1.04 = 442000	459680	478067	497190
Sale	0	0	0	0	0	13000000*1.08^5 = 19101264
Net cash flow	-13000000	1023750	1050212	1077299	1105021	20234654

Discount factor	1/1.08^0 = 1	1/1.08^1 = 0.926	0.857	0.794	0.735	0.681
Present value	-13000000	947992.5	900031.7	855375.4	812190.4	13779799

NPV = Sum of present values = 4,295,389.374