Question

You can buy property today for $3 million and sell it in 5 years for $4 million. (You earn no rental income on the property.)

a. If the interest rate is 8%, what is the present value of the sales price? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

b. Is the property investment attractive to you?

c-1. What is the present value of the future cash flows, if you also could earn $200,000 per-year rent on the property? The rent is paid at the end of each year. (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

c-2. Is the property investment attractive to you now?

Answer 1

PV value of sales price

= Sale value * PVF ( 8%, 5th year)

= 4000000*0.6805

= 2722332

Present value of cash inflows = 2722332

Present value of cash outflow = 3000000

Net present value = Present value of cash inflows - Present value of cash outflows

= 2722332-3000000

= -277668

Investment is not attractive as the NPV is negative

2)

Particualrs	Amount	Year	PVF @ 8%	Present Value
Property purchase	(3,000,000)	0	1.00	(3,000,000)
Annual rent	200,000	1	0.93	185,185
Annual rent	200,000	2	0.86	171,468
Annual rent	200,000	3	0.79	158,766
Annual rent	200,000	4	0.74	147,006
Annual rent	200,000	5	0.68	136,117
Sale Value	4,000,000	5	0.68	2,722,333
Net present value				520,875

Investment is attractive since the net present value is positive