Question

You are presented with a real estate investment with cash flow in year 1 of $100,000, increasing by $5,000 per year through year 5. And, you estimate you can sell the deal at the end of the 5th year for $1,250,000. If your discount rate is 12%, should you buy the deal at the $1,100,000 asking price?

A) Yes, because the IRR is a positive 9.34%

B) No, because the NPV is a negative $33,455

C) Yes, because the NPV is a positive $1,746

D) No, because the NPV is less than the asking price

Answer 1

Ans C) Yes, because the NPV is a positive $1,746

Year	Project Cash Flows (i)	DF@ 12%	DF@ 12% (ii)	PV of Project ( (i) * (ii) )
0	-1100000	1	1	(11,00,000.00)
1	100000	1/((1+12%)^1)	0.892857	89,285.71
2	105000	1/((1+12%)^2)	0.797194	83,705.36
3	110000	1/((1+12%)^3)	0.711780	78,295.83
4	115000	1/((1+12%)^4)	0.635518	73,084.58
5	1370000	1/((1+12%)^5)	0.567427	7,77,374.79
		NPV	1,746.27
	Cash Flow In year 5 =	115000 + 5000 + 1250000
		1370000