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Assume a commercial building is selling for $500,000 and will have rental income as follows: year...

Assume a commercial building is selling for $500,000 and will have rental income as follows: year 1: 40,000; year 2: 45,000; year 3: 52,000; year 4: 56,000; year 5: 63,000. You have good estimates of future value and expect to be able to sell it for $700,000 at the end of year 5. Your required rate of return is 9%. According to your NPV analysis should you buy the building?

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Expert Solution

i ii iii=i+ii iv v=iii*iv
Year Outflow Inflow Net cash flow PVIF @ 9% Present value
0       (500,000)        (500,000)     1.0000 (500,000.00)
1          40,000            40,000     0.9174      36,697.25
2          45,000            45,000     0.8417      37,875.60
3          52,000            52,000     0.7722      40,153.54
4          56,000            56,000     0.7084      39,671.81
5        763,000          763,000     0.6499    495,897.65
   150,295.85
NPV = $ 150,295.85
since, NPV is positive, building should be bought

jeff jeffy answered 2 years ago
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