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In: Finance

Kamala is interested in buying a property for $150,000. The costs are as follow: $50,000 in...

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

Solutions

Expert Solution

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


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