Chapter 5-5 You can buy property today for $2.8 million and sell it in 4 years f
ID: 2728371 • Letter: C
Question
Chapter 5-5
You can buy property today for $2.8 million and sell it in 4 years for $3.8 million. (You earn no rental income on the property.)
If the interest rate is 11%, what is the present value of the sales price? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)
What is the present value of the future cash flows, if you also could earn $180,000 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.)
You can buy property today for $2.8 million and sell it in 4 years for $3.8 million. (You earn no rental income on the property.)
Explanation / Answer
a.The present value (PV) of the investment = FV/(1+r)^n
where FV = Future value = 3,800,000
r = 11% =0.11
n = 4 years = 4
The present value (PV) = 3,800,000/1.11^4 = 2,503,177.70
b. No. The proprty is not attractive sinc the present value (PV) is lower than the amount of investment (2,800,000) and hence you are paying more for the property
c. Here, the present vlaue is the PV of the rents for the 4 years along with the and the PV of sale at the end of 4 years
The present value (PV) with rent = 180,000/1.11 + 180,000/1.11^2 + 180,000*/1.11^3 + 180,000/1.11^4 + 3,800,000/1.11^4 = $3,065,988.77
d. Yes. The property is attraivtive now since the PV calculated is greater than the amount of investmen
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.