Question

Suppose you own a small company that is contemplating construction of a suburban office block. The cost of buying the land and constructing the building is $770,000. Your company has cash in the bank to finance construction. Your real estate adviser suggests that you rent out the building for two years at $33,500 a year and predicts that at the end of that time you will be able to sell the building for $868,000.

Thus there are now two future cash flows--a cash flow of C1= $33,500 at the end of year 1 and a further cash flow of C2 = ($33,500+868,000) = $901,500 at the end of the second year.

A. Calculate the NPV of thr office building venture at the interest rates of 7, 12, and 17%.

B. At what discount rate (approximately) would the project have a zero NPV? Check your answer by calculating the NPV at the approximate rate, it should be close to zero.

Answer 1