Question

An investment company is deciding to invest $250,000 in developing a new rental property in Califonia. The company estimated annual costs are $6,000 and annual revenues are $20,000.

a) What rate of return per year will the investor make over a 15-year period ignoring the salvage value?

b) If the property can be sold for $100,000 what is the rate of return?

c) What method should the investor use to consider whether the conceptual investment cost provided is reasonable, and what factors should be considered in determining that cost?

Answer 1

a)
PV	250000
PMT = 20000-6000	14000
Period	15
Rate = Rate(Nper,PMT,-PV)	-2.10%
b)
Rate of Return =( $100,000 + (14000  x 15) - 250000)/$250,000	24.00%
c)
There are three methods we can considered in determine the cost : 1) capitalization rate can be used to assess the market value of properties,2)  cash-on-cash return can help you compare different potential investment properties, and 3) total return can help you assess an investment's performance including equity appreciation.