REPE Interview Question: Evaluating whether to carry out CapEx?
So in an interview I was asked whether or not I should carry out the capital expenditure for this hypothetical scenario:
- Property purchase price : £5B
- Yearly Rental Income £200m
- Analyst said we had a 'cap rate' of 4% (which by defintion isn't strictly true but I got his drift)
He then asked if the following proposal should be carried out
- Capital expenditure of £1B that yields an additional £70m of rental income every year
- This takes the yearly rental income to £270m
The way I thought about this was that the annual return on capital expenditure is 7% and seeing as this exceeds our current cap rate (4%) then this should be beneficial.
The interviewer seemed to agree with me but I would be curious to know how would you all go about thinking about this?