Real Estate Finance & Investments 15th Edition by William Brueggeman, Jeffrey Fisher

Exercise 2

Ace Investment Company is considering the purchase of the Apartment Arms project. Next year's NOI and cash flow is expected to be $2,000,000, and based on Ace's economic forecast, market supply and demand and vacancy levels appear to be in balance. As a result, NOI should increase at 4 percent each year for the foreseeable future. Ace believes that it should earn at least a 13 percent return on its investment.
a. Assuming the above facts, what would the estimated value for the property be now
b. What "going-in" cap rates should be indicated from recently sold properties that are comparable to Apartment Arms
c. Assuming that in part ( a ) the required return changes to 12 percent, what would the value be now
d. Assume results in part ( c ). What should the investor now be observing regarding the price of "comparable" sales What market forces may be accounting for the differences in value between ( a ) and ( c )