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How to get the terminal value of £ 8,915,309 as done in part (a) of the question.
Thank you 🙂
The construction cost was 6.2M. Property prices are inflating by 8% in real terms and so since general inflation is 2.5% it means that the actual inflation in money terms is (1.08 x 1.025) – 1 = 0.107 (or 10.7%).
So the value after 5 years will be 6.2M x (1.107^5) = 10,306,941The charge for repairs and renewals is 1.2M at current prices. There is general inflation at 2.5%, and so the actual money cost is 1.2M x (1.025^6) = 1,391,632
So the net cash inflow is 10,306,941 – 1,391,632 = 8,915,309
Thank you so much, I’ve been doing it incorrectly with the number of years and the actual inflation. Thank you!
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