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

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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

jeff jeffy answered 2 years ago

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