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Bob is considering buying a home and selling it in one year. At t=0 he buys...

Bob is considering buying a home and selling it in one year. At t=0 he buys a house, the price is $100,000. At t=1 the house appreciates (i.e. the price goes up) by 20%, and Bob sells it.

Bob also pays transaction costs: buying costs are 5% of buying price, selling costs are 8% of selling price. Each time period is a year. Bob does not take any mortgages. Find the NPV of this project if the interest rate is 4%.

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Expert Solution

Calculation of NPV

Particulars T-0 T-1
Purchase Cost $ -100,000.00                        -  
Buying Cost $       -5,000.00                        -  
Selling Price                         -   $ 120,000.00
Selling Cost                         -   $      -9,600.00
Net Cash Flows $ -105,000.00 $ 110,400.00
Discounting Factor @ 4%                     1.00                   0.96
Present Value of Cash Flows $ -105,000.00 $ 105,984.00

NPV = -$105,000.00 + $105,984.00 = $984

jeff jeffy answered 2 years ago
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