Assume that you are the purchaser of the building at the end of the construction period, and you have paid the developer an amount which gives you a 7% annual return on net revenue generated by the building in its first year of occupancy.
You do not pay tax, and you have paid for the building from your cash reserves - i.e. you are not borrowing money, nor are you charging yourself interest.
(a) Gross rentals are reviewed every two years, and are increased by an amount relating to a CPI increase of 4% per annum.
(b) Outgoings increase annually by 5% per annum.
(c) You make no further investment in the building.
(d) You calculate the building to command a 6.5% annual return to a buyer when it is sold at the end of the tenth year of operation.
Calculate (over a 10 year period of ownership)
1. Annual net cash flows.
2. Cumulative cash flows.
3. Net present value of the cash flows using a 12% discount rate.
4. DCF rate of return for the project.