In the below example, how did we come up with the FV =4MM.
Example: Valuation during renovation On January 1 of this year, renovation began on a shopping center. This year, NOI is forecasted at €6 million. Absent renovations, NOI would have been €10 million. After this year, NOI is expected to increase 4% annually. Assuming all renovations are completed by the seller at their expense, estimate the value of the shopping center as of the beginning of this year assuming investors require a 12% rate of return. Answer: The value of the shopping center after renovation is: = €125,000,000 Using our financial calculator, the present value of the temporary decline in NOI during renovation is: N = 1; I/Y = 12, PMT = 0; FV = 4,000,000; CPT → PV = €3,571,429 (In the previous computation, we are assuming that all rent is received at the end of the year for simplicity). The total value of the shopping center is: Value after renovations €125,000,000 Loss in value during renovations (3,571,429) Total value €121,428,571