A property has a McDonald's restaurant on it, which can earn $50,000 per year. In any other use including another brand of restaurant), the most it can earn is $40,000 per year. Assuming a discount rate of 10% and constant cash flow in perpetuity, what is the "investment value" of this property to McDonald's, and what is its "market value"?

Question

Quizplus · Accepted Answer

The investment value to McDonald's is calculated using the cash flow it can generate from the property, which is $50,000 per year. Using the formula for perpetuity, Value = Cash Flow / Discount Rate, the investment value is $50,000 / 0.10 = $500,000. The market value is based on the best alternative use of the property, which generates $40,000 per year, leading to a market value of $40,000 / 0.10 = $400,000.

A Property Has a McDonald's Restaurant on It, Which Can