Ramzy inherited $5 million from her favorite uncle. Being a studious real estate
ID: 2645145 • Letter: R
Question
Ramzy inherited $5 million from her favorite uncle. Being a studious real estate student she feels that she should invest a portion of her inheritance in real estate; that is, after she comes back from her world cruise. She is considering a small office building that is being offered for $1.6 million. The net operating income is as follows:
Year 1 $175,000, Year 2, $185,000, Year 3, $150,000, Year 4, $165,000, Year 5, $170,000, Year 6, $185,000. Year 7, $195,000. She plans to sell it at the end of year seven base on year eight
Explanation / Answer
Year Particulars Amount PVF @ 12% PV of Amount 0 Purchase cost of office 1600000 1 1600000 Total Outflow (A) 1600000 1 Net Operating Income 175000 0.89285714 156250 2 Net Operating Income 185000 0.79719388 147480.87 3 Net Operating Income 150000 0.71178025 106767.04 4 Net Operating Income 165000 0.63551808 104860.48 5 Net Operating Income 170000 0.56742686 96462.57 6 Net Operating Income 185000 0.50663112 93726.76 7 Net Operating Income 195000 0.45234922 88208.10 Beginning of year 8 Salvage value after Tax(1-.10) 193500 0.45234922 87529.57 (215000 x 0.90) Total Inflow (B) 881285.3805 Net Cash Inflow (B) - (A) -718714.62 As NPV of this plan is negative, so Ramzy should avoid purchasing this property.
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