A building is available for sale for $5 million. The property is derelict and mu

Question

A building is available for sale for $5 million. The property is derelict and must be destroyed at a cost of $ 3 million. The State of Florida wants the property to building an inner city detention center and has an allocated budget for the land of $12 million. It will take one year to demolish and clear out the property and another year to sell and transfer the building to the State. The cost of capital is 10 %. Calculate the NPV B) Calculating the NPV with a required profit of $1,000,000. C) Please explain if this project is worth taking.

Explanation / Answer

Year 0 cash flow is -$5 million

Year 1 cash flow -$3 million

Year 2 cash flow $12 million

Find the present values of each cash flows as follows

PV = Cash flow / (1+10%)n

So NPV is the sum of all present values which is $2.19 million

Since the required profit is $1 million, and profit generated from the project is more than that, the company should accept the project.

Note: I have assumed that both the payments will occur at the end of the period.

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