Question: The table below shows the projected net cash flows [including reversion] for Property A & Property B. If both properties sell at fair market value for a cap rate [initial and terminal net cash yields] of seven percent, then which of these two properties is perceived to be riskier by the market? Explain your answer.
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Annual net cash flow projections for two properties ($1,000,000s):
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Year:
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1
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2
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3
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4
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5
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6
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7
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8
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9
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10
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A
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$1.0000
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$1.0000
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$1.0000
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$1.0000
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$1.0000
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$1.0000
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$1.0000
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$1.0000
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$1.0000
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$15.2857
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B
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$1.0000
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$1.0200
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$1.0404
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$1.0612
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$1.0824
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$1.1041
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$1.1262
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$1.1487
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$1.1717
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$18.6093
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