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can u tell me how to calculate how to calculate terminal value of property in the question?
The cost of the hotel now is $6.2M. Property values are increasing at 8% per annum, and so the value in 5 years time = 6.2 x 1.08^5 = $9.110M
I did the same thing but the question say that the residual value of the investment over the six year is assumed to be the open market value of property less a charge for repairs and renewals. Repair and renewal value is £ 1.2 million in current price payable on disposal. And answer show terminal value of property in 31dec2014 is £8.915million .. guide me about this figure
First, because the value is increasing at 8% in real terms (i.e. ignoring general inflation), the actual rate of increase will be higher. It will increase by 10.7% p.a. ((1.08 x 1.025) – 1)
Secondly, because note 1 of the question says that construction costs are paid at the end of the year, there is will only be 5 years inflation at 10.7%
Finally, note 3 in the question says that there is a charge for repairs and renewals payable on disposal of 1.2M quoted at current prices.
So…the net amount is (6.2M x 1.107^5) – (1.2M x 1.025^6)
which is 10306941 – 1391632 = 8915309
A horrible exam question (but the final value of the property was only worth 1 mark) 🙂
(And BPP have a different answer, which is completely wrong!)
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