You are considering the purchase of a small retail shopping complex that will generate net cash...

You are considering the purchase of a small retail shopping complex that will generate net cash flows each of the next 15 years, starting at $500,000 in Year 1. You normally demand a 12% rate of return on such investments. Future cash flows after year 1 are expected to grow with inflation at 5% per year. How much would you be willing to pay for the complex today if it will have to be torn down in 15 years, and the land could be sold for a net amount of $4 million in year 15?

Solutions

Expert Solution

Value of an Asset = PV of cash flows from it.

CF of Year 2 = CF of Year 1 * ( 1+ Growth Rate )

CF of Year 3 = CF of Year 2 * ( 1+ Growth Rate )

CF of Year 15 = CF of Year 14 * ( 1+ Growth Rate )

Max amount can be paid to House is

51,60,696.43

jeff jeffy answered 1 week ago

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