Question

Suppose that you are considering a real estate investment that will provide you with the following cash flows:

Year 1: $160,000

Year 2: 140,000

Year 3: 180,000

Year 4: $5.4 million

If the asking price for the property is $3.5 million, what will the NPV be for this investment? Show work

a.14.90%

b.15.57%

c. 16.56%

d:14.57%

e: none of the above

Answer 1

Solution: d:14.57%

Workings:-

Discounted cash flow at assumed discount rate:

Year	Cash flow	Present value factor @ 14%	Discounted Cash flow @ 14% [2]*[3]	Present value factor @ 15%	Discounted Cash flow @ 15% [2]*[5]
[1]	[2]	[3]	[4]	[5]	[6]
1	160,000	0.8772	140,350.88	0.8696	139,130.43
2	140,000	0.7695	107,725.45	0.7561	105,860.11
3	180,000	0.6750	121,494.87	0.6575	118,352.92
4	5,400,000	0.5921	3,197,233.50	0.5718	3,087,467.54
Total Inflow		3,566,804.70		3,450,811.00

IRR = 14 + ( 3566804.7-3500000)/(3566804.7-3450811)

= 14.57%