Question

Suppose that annual income from a rental property is expected to start at $1330 per year and decrease at a uniform amount of $70 each year after the first year for the 16 year expected life of the property. The investment cost is $6900 and i is %10 per year. What is the present equivalent of the rental income? Assume that the investment occurs at time zero (now) and that the annual income is first received at the end of first year

Answer 1

		Discount rate = R = 10%	Present value = Df x Cash flows
Year	Cash flows	Discount factor = Df = 1/(1+R)^Year	PV of cash flows
0	(6,900.00)	1.000000	(6,900.00)
1	1,330.00	0.909091	1,209.09
2	1,260.00	0.826446	1,041.32
3	1,190.00	0.751315	894.06
4	1,120.00	0.683013	764.98
5	1,050.00	0.620921	651.97
7	980.00	0.513158	502.89
8	910.00	0.466507	424.52
9	840.00	0.424098	356.24
10	770.00	0.385543	296.87
11	700.00	0.350494	245.35
12	630.00	0.318631	200.74
13	560.00	0.289664	162.21
14	490.00	0.263331	129.03
15	420.00	0.239392	100.54
16	350.00	0.217629	76.17
		Net Present Value = Total of Present Values	$155.99
		Present Value = Total of Present Values + Investment = 155.99 + 6900 =	$7,055.99