8.54 a & b Suppose a certain property is expected to produce net operating cash

Question

8.54 a & b Suppose a certain property is expected to produce net operating cash flows annually as follows, at the end of each of the next five years: $35,000, $37,000, $45,000, $46,000, and $40,000. In addition, at the end of the fifth year, we will assume the property will be (of could be) sold for $450,000/

a. what is the NPV of a deal in which you would pay $400,000 for the property today assuming the required expected return or discount rate is 12% per year?

b. if you could get the property for only $375,000, what would be the expected IRR of your investment?

how do I do this all in excel?

Explanation / Answer

For both parts a&b write down the cash flows in excel. Calculate the NPV (net present value) as shown below. Use the "Formulas" and 'Financial" functions in excel to calculate the IRR (Internal rate of return).

a) Present Value = Future value/ ((1+r)^t) where r is the interest rate that is .12 and t is the time period Net present value = initial investment + sum of present values Year 0 1 2 3 4 5 Cash flow -400000 35000 37000 45000 46000 490000 Present value 31250.00 29496.17 32030.11 29233.83 278039.16 Net present value 49.28 The net present value of the deal $49.28 b) Year 0 1 2 3 4 5 Cash flow -375000 35000 37000 45000 46000 490000 Internal rate of return 0.1373 The expected IRR of the investment 13.73%

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