Bandal Corporation wishes to purchase an apartment complex that provides annual cash ﬂows from rental property of $2,000,000. Rental increase is approximated at 2% per year into the foreseeable
Future. If Bandal's return requirement is 10%, determine the value of the apartment complex.

Question

Quizplus · Accepted Answer

To determine the value of the apartment complex, we can use the formula for the present value of an annuity:

PV = CF / r

where PV is the present value, CF is the cash flow per period, and r is the discount rate.

In this case, the cash flow per period is $2,000,000 per year, and the discount rate is 10%. To account for the rental increase, we can use the perpetuity formula:

P = (CF / r) x (1 + g)

where P is the present value, CF is the initial cash flow, r is the discount rate, and g is the growth rate. In this case, the initial cash flow is still $2,000,000 per year, and the growth rate is 2% per year.

Plugging in the numbers, we get:

PV = $2,000,000 / 0.10 = $20,000,000

P = ($2,000,000 / 0.10) x (1 + 0.02) = $25,000,000

Therefore, the value of the apartment complex is $25,000,000. The answer is C.

Bandal Corporation Wishes to Purchase an Apartment Complex That Provides