Question

In: Finance

Suppose that annual income from a rental property is expected to start at $1330 per year...

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

Solutions

Expert Solution

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


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