Question

Suppose you have the opportunity to make an investment in a real estate venture that expects to pay investors $750 at the end of each month for the next 8 years. Based on the risk, you believe that a reasonable rate of return on your investment should be an annualized rate of 15% compounded monthly. (A) How much should you pay for the investment?

Suppose you have the opportunity to make an investment in a real estate venture that expects to pay investors $750 at the end of each month for the next 8 years. Based on the risk, you believe that a reasonable rate of return on your investment should be an annualized rate of 15% compounded monthly.

(B)        What is the total sum of cash you will receive over the 8 years?

Suppose you have the opportunity to make an investment in a real estate venture that expects to pay investors $750 at the end of each month for the next 8 years.  Based on the risk, you believe that a reasonable rate of return on your investment should be an annualized rate of 15% compounded monthly.

  

(C)        What is: (1) the difference ($ amount) between the answers provided for (A) and (B)

Suppose you have the opportunity to make an investment in a real estate venture that expects to pay investors $750 at the end of each month for the next 8 years. Based on the risk, you believe that a reasonable rate of return on your investment should be an annualized rate of 15% compounded monthly.

(D)        What is the difference between the answers provided for (A) and (B) called in words?

Suppose you have the opportunity to make an investment in a real estate venture that expects to pay investors $750 at the end of each month for the next 8 years. Based on the risk, you believe that a reasonable rate of return on your investment should be an annualized rate of 15% compounded monthly.

(E)        What is the Equity Multiple for this investment?

Answer 1

Facts of the Question:

Investment should pay to investor each month $ 750 for 8 years or 96 months

Annualized interest rate with monthly compounding = 15% P.a or 15%/12= 1.25% per month.

A. Calculation investment value to get $750 per month:

Investment required to get $750 per month = Monthly return in $/ Monthly compounding interest rate

Investment required to get $750 per month = $750/1.25%= $60,000

B.Calculation of total sum of cash received over the 8 year or 96 months:

Total sum received over 8 years = Monthly cash received x Number months cash received

Total sum received over 8 years = $750 x 96= $72,000

C. Calculation of difference between answer in above part A and B in ($ amount):

Investment made as per PART A $60,000 LESS Return received as per PART B $72,000

Difference in PART A and PART B = $12,000

D. Calculation of difference between answer in above part A and B (in Word):

Twelve thousand Dollar. (It mean investment was made $60,000 and total return earned $72,000. )

E. Calcualation of equity multiple:

Equity multiple= Total dollars received / Total dollars invested

Equity multiple= $72,000/$60,000= 1.2