In: Finance
1. A real estate investor is considering an investment in a building that will generate profits of $22,000 at the end of each year for the next 10 years. The investor requires a 22% return on the investment to compensate for the risk they are taking. | |||||||||||
a. How much should the investor pay today for the investment? | |||||||||||
b. How much should the investor pay today for the investment if profits at the then end of year 1 are $22,000, and are expected to grow 2.5% each following year? I will love to know what excel formulas to use since the question has to be done using excel. |
PART a: He should pat $86310.06 for the investment
Year | Cash flows |
1 | 22000 |
2 | 22000 |
3 | 22000 |
4 | 22000 |
5 | 22000 |
6 | 22000 |
7 | 22000 |
8 | 22000 |
9 | 22000 |
10 | 22000 |
NPV | $86,310.06 |
PART b He should pay $93049.52 for the investment.
Year | Cash flows |
1 | 22000.00 |
2 | 22550.00 |
3 | 23113.75 |
4 | 23691.59 |
5 | 24283.88 |
6 | 24890.98 |
7 | 25513.26 |
8 | 26151.09 |
9 | 26804.86 |
10 | 27474.99 |
NPV | 93049.52 |
WORKINGS