Specimen paper q11

Discussion in 'CAA' started by Kchapman22, May 24, 2021.

  1. Kchapman22

    Kchapman22 Member

    Hi all could someone kindly provide working for the following question please:
    A property developer is considering investing in a project. The project is a special
    arrangement with a local business that owns an empty office building and is in
    need of short-term cash.
    Under the terms of the arrangement the developer will buy the building for
    £5,000,000. In order to make the building suitable as a business premises he will
    need to spend £7,000,000 continuously during the first year. At the end of the first
    year, he will let the property to the business for a further ten years at a fixed
    annual rent, payable annually in advance. The business will then buy back the
    property from him at twice the original sale price i.e. £10,000,000.
    Calculate to the nearest £5,000 the annual rent the developer needs to charge in
    order to obtain an internal rate of return of 7% p.a. from this project.

    Answer is 220,000 but can't see how this is correct. Or how the answer was obtained.

    Any help on this would be very appreciated.
    Thanks
     

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