You can buy property today for $2.2 million and sell it in 5 years for $3.2 mill

Question

You can buy property today for $2.2 million and sell it in 5 years for $3.2 million. (You earn no rental income on the property.) a. If the interest rate is 10%, what is the present value of the sales price? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.) Present value million b. Is the property investment attractive to you? O Yes O No c-1. What is the present value of the future cash flows, if you also could earn $120,000 per year rent on the property? The rent is paid at the end of each year. (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.) Present value million

Explanation / Answer

a). Present Value = Ct / (1 + r)t

= $3,200,000 / 1.105 = $1,986,948.23

b). No, as the present value of sale price is less than the cost of property today.

c1). PV = $120,000/1.11 + $120,000/1.12 + $120,000/1.13 + $120,000/1.14 + $120,000/1.15 +

$3,200,000/1.15

= $109,090.91 + $99,173.55 + $90,157.78 + $81,961.61 + $74,510.56 + $1,986,948.23

= $2,441,842.65

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