Consider the following projected cash flows (including reversion) for Property A and Property B for the following 10 years. Annual net cash flow projections for two properties ($ millions)
1 2 3 4 5 6 7 8 9 10
A $1.0000 $1.0050 $1.0100 $1.0151 $1.0202 $1.0253 $1.0304 $1.0355 $1.0407 $12.7252
B $1.0000 $1.0200 $1.0404 $1.0612 $1.0824 $1.1041 $1.1262 $1.1487 $1.1717 $14.7395
a. What is the annual growth rate in operating cash flows for each building during the first nine years?
b. If both properties sell at cap rates (initial and terminal cash yields) of 9%, what is the expected annual return on a 10-year investment in each property?
c. If the 9% cap rate represents a fair market value for each property, then which property is the more risky investment (and how do you know)?