You are offered an investment that guarantees to pay you back $200 per month for the next 5 years. The annual rate of return for similar investments is 12%. What is the most you should be willing to pay for it today?

Grading criteria:    Each problem is worth 10 points.

Below is the rubric I will be using when grading your solutions to each problem:

 

 

I expect to see the following: 0 points 1 point 2 points
Show correct numerical answer Incorrect Numerical answer is incorrect because of a typo somewhere in the calculations

OR

Numerical answer is correct but only in some intermediate steps

Correct
Show correct formulas Not shown Shown for some, but not all, steps Shown for all steps
Show correct numbers that go into the formulas Not shown Shown for some, but not all, steps Shown for all steps
Brief verbal explanation: why you’re doing what you’re doing in each step Not shown Shown for some, but not all, steps Shown for all steps
Appearance Hand-written Partially hand-written and partially typed Typed

 

 

Example:

You are offered an investment that guarantees to pay you back $200 per month for the next 5 years. The annual rate of return for similar investments is 12%. What is the most you should be willing to pay for it today?

 

Great answer!

(2 + 2 + 2 + 2 + 2 = 10 points)

Needs-some-work answer

(1 + 1 + 1 + 0 + 2 = 5 points)

 

This is an annuity problem because the problem is talking about the same cash flow ($200) repeating a number of times.

The problem is essentially asking to calculate the Present Value of this annuity. The formula is: PV = C x (1/R) x (1 – 1/(1+R)T). (OR: I can use the financial calculator and enter PMT, N, and I/Y keys to solve for PV.)

First, $200 is repeating monthly, and so I need to use the monthly rate and the number of months. Monthly R = annual R / 12 months = 12% / 12 = 1%. Number of months = 5 years x 12 months per year = 60 months.

Then, I plug in the numbers into the annuity formula where I use C=200, R=0.01, T=60. (OR:  Then, I plug all resulting numbers into the financial calculator: PMT=-200, I/Y=1, N=60, CPT PV.) This gives $8,991.01.

So, I would pay no more than $8,991.01 for this investment.

N = 5

I/Y = 12

PMT = -200

CPT PV

$720.96

 

 

Q: What’s missing?

A: Intermediate steps explaining & calculating the right numbers to be used for “N” and “I/Y”. Explanation in own words showing you know what you’re doing.

 

 

 

 

 

 

 

The questions in this homework are based on data that I would like you to get from the following three websites: (1) Simon Property Group (www.simon.com), (2) US Census Bureau (www.census.gov), and (3) Bureau of Labor Statistics (www.bls.gov).

For each question, show in your write-up all numbers you are working with, and explain all relevant calculations. Take a screen-shot, etc. of the website from which your data was downloaded, so I can verify your numbers, and include in your uploaded document.

Problem #1 (10 points)

Simon Property Group (www.simon.com) is one of the largest real estate companies in the world which in particular owns hundreds of shopping centers in the US as well as overseas.

  • Pick one of their shopping centers in California. On the website find and summarize in your write-up information for:
  • Mall type
  • GLA
  • Main anchors
  • Size of, and information on, trade-area resident population
  • Size of, and information on, trade-area non-resident population
  • Main competitors in the trade area that the website gives
  • Using “Reilly’s Law of Retail Gravitation” calculate the break-point distance for your shopping center in part (a) relative to the nearest Simon Property Group shopping center. Use GLA sizes for “populations” in the formula. What does the result tell you? Explain.

Problem #2 (10 points)

For Los Angeles metropolitan statistical area calculate the Actual Sales Index for personal care products and services based on the most recent available data. For the data use the US Census’ FactFinder “Advanced Search”, select the right geographies and the right NAICS retail category. In addition, for the same year, for the same geography calculate the Spending Potential Index for personal care products and services. For the data go to the Bureau of Labor Statistics website, in the search line type “Consumer Expenditure Survey” (CEX). On the new page, on the left under “geography” you can then select the right geography.

Do your results suggest “leakage” or “inflow” of consumer spending in Los Angeles MSA? Explain. How can this finding be used in real estate market studies?

 

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