Armor Investment Company is considering the acquisition of a heavily depreciated building on 10 acres of land. It expects to rent the building as a storage facility and expects to collect cash flows equal to $100,000 next year. However, because depreciation is expected to increase, Armor expects cash flows to decline at a rate of 4 percent per year indefinitely. Armor expects to earn an IRR on investment return (r) at 13 percent.a. What is the value of this property?b. Assume that after 5 years the building could be demolished and the land could be redeveloped with a strip retail improvement. The latter would produce NOI of $200,000 per year, growing at 3 percent per year, and cost $1 million to build. Investors currently earn a 10 percent IRR on such investments. How would this affect your estimate of value in (a)?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Armor Investment Company is considering the acquisition of a heavily
a. What is the value of this property?
b. Assume that after 5 years the building could be demolished and the land could be redeveloped with a strip retail improvement. The latter would produce NOI of $200,000 per year, growing at 3 percent per year, and cost $1 million to build. Investors currently earn a 10 percent IRR on such investments. How would this affect your estimate of value in (a)?
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