During a period when the real estate market in Phoenix, Arizona, was undergoing

Question

During a period when the real estate market in Phoenix, Arizona, was undergoing a significant downturn, CSM Consulting Engineers made an agreement with a distressed seller to purchase an office building under the following terms: total price of $2.1 million with a down payment of S400,000 now and no payments for 6 years, after which the remaining balance of $1.7 million would be paid. CSM was able to make this deal because of poor planning to sell the building in 6 years (when market conditions would probably be better) and move to a larger office building in Scottsdale, Arizona. If CSM was able to sell the building in exactly 6 years for $2.8 million, what rate of return per year did the company make on the investment? Solve the problem using formula, table values and spreadsheet function and compare them 4. market conditions at the time of purchase, and, at the same time

Explanation / Answer

Using Formula:

Annual Rate

AR = ((P + G) / P) ^ (1 / n) - 1

P = principal, or initial investment

G = gains or losses

n = number of years

P = $400000

G = 2.8-1.7-.4 = 0.7 million = $700000

n = 6

AR = ((400000+700000)/400000)^(1/6) -1

AR = 18.36%

Using spreadsheet function =IRR()

Initial investment          - 400000

final payement receipt   1100000

putting above column in =IRR() function and enter

IRR = 175%

Total percentage gain is 175%

annual = 175/6%

NOTE : Table values not given

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