Property Investment and Valuation

Quiz Instructions

 

As discussed in lecture 7 on 12 October 2020, the idea of this mock exam is to provide an opportunity to practice and familiarise yourself with the online exam environment including built-in functionalities in Canvas so that you are better prepared for your final examination on 9 November 2020 (between 12:30pm and 4:30pm AEST time). The formula sheet is attached for your reference.

Please be advised that this exam will not be marked and the questions in the mock exam have been drawn from previous lecture notes and tutorial questions.

Financial Formula.pdf

Note: this is a timed quiz. You may check the remaining time you have at any point while taking the quiz by pressing the keyboard combination SHIFT, ALT, and T… Again: SHIFT, ALT, and T…

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Question 12 pts

Part A (Q1)

The present full costs associated with replacing strata buildings is $1,000,000. Estimate the future costs of replacing the buildings where the rate of interest is 7% pa compounded annually and the term is 3 years.

Group of answer choices

1. 1,135,232
2. 1,225,043
3. 1,235,263
4. 1,189,232

 

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Question 22 pts

Part A (Q2)

Your client needs to budget for the replacement of a roof in four years at a projected future cost of $900,000. Your client instructs you to use a rate of 5% pa compounded annually. How much should be invested now?

Group of answer choices

1. 740,432
2. 741,253
3. 739,242
4. 740,023

 

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Question 32 pts

Part A (Q3)

Which of the following is not a basic component of any compounding problem?

Group of answer choices

1. A net present value
2. An initial deposit
3. an interest rate
4. a period of time

 

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Question 42 pts

Part A (Q4)

If there is compounded monthly at a nominal annual rate of 12% p.a., what is the effective interest rate?

Group of answer choices

1. 12%
2. 12.36%
3. 12.55%
4. 12.68%

 

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Question 52 pts

Part A (Q5)

Assume that you wish to accumulate a sum of $250,000 in five years at an interest rate of 4% per year. What is the necessary payment at the end of each month?

Group of answer choices

1. $3,145
2. $3,529
3. $3,771
4. $3,422

 

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Question 62 pts

Part A (Q6)

If you invest a sum of $15,000 every year for 15 years at 4% pa compounded annually, how much will you have at the end of 15 years?

Group of answer choices

1. $301,264
2. $300,276
3. $302,623
4. $300,354

 

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Question 72 pts

Part A (Q7)

You can purchase a property which returns $50,000 per annum. If investments similar to this one reveal, on analysis, a return of 8.5% pa compounded annually. How much should you pay for it, if the return was only available for 20 years?

Group of answer choices

1. $473,167
2. $477,234
3. $472,636
4. $475,256

 

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Question 82 pts

Part A (Q8)

If you invest $30,000 at the beginning of each year for 5 years, at 6.5% pa compounded annually, how much will you have at the end of 5 years?

Group of answer choices

1. $182,354
2. $181,253
3. $181,912
4. $183,235

 

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Question 92 pts

Part A (Q9)

An investor receives a net rental of $24,500 at the beginning of each year from a commercial property for the next 12 years. What would the investor pay for the right to receive this amount if a return of 5.75% pa is required?

Group of answer choices

1. $221,128
2. $220,223
3. $220,843
4. $221,963

 

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Question 102 pts

Part A (Q10)

A company is considering expenditure for a capital project with an initial cost of $10,000,000. It is expected to return annual cash inflows for the next three years as shown below. The company requires a 10% target return. Calculate the NPV and comment whether the company should proceed with the project?

	Net Cash Flow
Year 1	$3,500,000
Year 2	$2,000,000
Year 3	$7,000,000

Group of answer choices

1. $93,914 should proceed with the project
2. -$34,253, should proceed with the project
3. -$30,423, should not proceed with the project
4. $93,542, should proceed with the project

 

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Question 1110 pts

Part B (Q1)

You have recently sold your apartment building for $500,000. It was purchased for $400,000 five years ago. You have taken depreciation deductions of $18,462 per annum. The unpaid mortgage balance is $325,000. Your marginal tax rate is 30%.

 

Question 1210 pts

Part B (Q2)

Describe two concepts of value (Investment Value and Market Value) and describe the relationship between these two values

 

Question 1315 pts

Part C (Q1)

• Assume that you are a real estate advisor and your client has been approached by Corporation X to see if your client is interested in entering into a sales and leaseback transaction.
• The value of the property subject to the proposed sales and leaseback transaction is $3m (land value: $1.5m and building value: $1.5m)
• Corporation X is looking to sell the land and its improvement (building) to your client for $3.5m.
• Simultaneously your client will enter into a 15-year lease agreement with Corporation X and receive $700,000 per annum and incur $50,000 per annum for operational expenditures.
• You estimate that at the end of year 15, the building and the land will be worth $5m and the estimated selling cost is $120,000 at the time.
• You have decided to use the straight line depreciation method with a zero salvage value and the useful life is 40 years.
• You client is subject to the annual tax rate of 30% and CGT rate of 50%
• Your client plans to finance the acquisition price with 100% equity (no debt) and you client’s required rate of return is 12%
• You are required to advise whether there the proposed sales and leaseback transaction is worth considering from your client’s perspective. Please show all your workings

 

 

 

Question 1415 pts

Part C (Q2)

Your client is looking to expand their existing operation and is in the process of considering whether should acquire or lease a new premise. You have been engaged to provide advice whether they should purchase or lease based on the following term sheets received.

Acquisition

• Purchase Price: $10m
• Financing: 60% LVR (Loan to Value Ratio), at 5% interest only payments with a balloon payment in 10 years
• Holding Period: 10 years
• Expected Sales Price: $15m (year 10)
• Selling Cost: 6% of the sales price
• Marginal tax rate: 30%
• Capital Gain Tax: 50%
• Useful life for depreciation: 30 years, straight-line method
• Land to value: 30%
• Required rate of return: 12%

What is the net present value and internal rate of return if your client acquires the property above. Please show all your workings.

 

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Question 1515 pts

Part C (Q3)

Your client is looking to expand their existing operation and is in the process of considering whether should acquire or lease a new premise. You have been engaged to provide advice whether they should purchase or lease based on the following term sheets received.

Acquisition

• Purchase Price: $10m
• Financing: 60% LVR (Loan to Value Ratio), at 5% interest only payments with a balloon payment in 10 years
• Holding Period: 10 years
• Expected Sales Price: $15m (year 10)
• Selling Cost: 6% of the sales price
• Marginal tax rate: 30%
• Capital Gain Tax: 50%
• Useful life for depreciation: 30 years, straight-line method
• Land to value: 30%
• Required rate of return: 12%

Lease

• Lease term: 10 years
• Rent: $600,000 p.a. for the first 5 years and 5% increase in the 2^nd5 years
• Marginal tax rate: 30%
• Required rate of return: 12%

What is the net present value and internal rate of return if your client leases the property. Please show all your workings.

 

Question 1615 pts

Part C (Q4)

Identify and explain the benefits and risks associated with investing in industrial real estate assets.