Consider the investment evaluation of a by Prof. David Geltner @MIT

Question 8 / 22: Consider the investment evaluation of a real estate development in which the property to be built is projected to reach stabilized occupancy at the end of Year 2 (two years from the time the investment decision must be made and construction will begin).

The project is speculative in that there are no leases signed as of Time Zero (the present, when the investment decision must be made).

The property level opportunity cost of capital is considered to be 9% for stabilized investments, and 10% for assets not yet stabilized (lease-up investments).

Which of the following is true?

A Property level before-tax cash flows beyond Year 2 should be discounted back to the end of
Year 2 at 9%, and the projected stabilized asset value as of the end of Year 2 should be discounted
two years to Time Zero at 10%.

B Property level before-tax cash flows beyond Year 2 should be discounted back to the end of
Year 2 at 10%, and the projected stabilized asset value as of the end of Year 2 should be discounted
two years to Time Zero at 9%.

C Property level before-tax cash flows beyond Year 2 should be discounted all the way back to
Time Zero at the 10% rate.

D Property level before-tax cash flows beyond Year 2 should be discounted all the way back to
Time Zero at the 9% rate.

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Real Estate Finance & Investment Final Exam 2006

Author:

Prof.David GeltnerProfessor

MIT Massachusetts Institute of Technology

USA

Access: Public Peer Review

Attribution: Geltner, David, and Tod McGrath. 11.431J Real Estate Finance and Investment, Fall 2006. (MIT OpenCourseWare: Massachusetts Institute of Technology), http://ocw.mit.edu/courses/urban-studies-and-planning/11-431j-real-estate-finance-and-investment-fall-2006 (Accessed 1 May, 2014). License: Creative Commons BY-NC-SA

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