In: Finance
Kamala is interested in buying a property for $150,000. The costs are as follow: $50,000 in yr 1 and 2 for repairs $10,000 in yr 3 and beyond for repairs She will start making money: $25,000 per year when she opens in yr 4 which will then start increasing by $40,000 each yr. By assuming all cash flows (with the exception of first costs) are end of period cash flows & the interest rate is seven percent 1. what is the present value(worth) of Kamala revenue through year 10? Is it + or negative? Could this be considered a good investment,why or why not? Please show work detailed, will upvote!(: thank you
The Net cashflows of the firm are calculated below
Time | Costs | Earnings | Net Cashflows |
0 | -150000 | -150000 | |
1 | -50000 | -50000 | |
2 | -50000 | -50000 | |
3 | -10000 | -10000 | |
4 | -10000 | 25000 | 15000 |
5 | -10000 | 65000 | 55000 |
6 | -10000 | 105000 | 95000 |
7 | -10000 | 145000 | 135000 |
8 | -10000 | 185000 | 175000 |
9 | -10000 | 225000 | 215000 |
10 | -10000 | 265000 | 255000 |
PV of revenues = -150000-50000/1.07+-50000/1.07^2-10000/1.07^3+15000/1.07^4+55000/1.07^5+95000/1.07^6+135000/1.07^7+175000/1.07^8+215000/1.07^9+255000/1.07^10
=$297893.92
As the Present worth is positive, it can be considered as a good investment