Question

In: Finance

1.       A real estate investor is considering an investment in a building that will generate profits...

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.

Solutions

Expert Solution

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


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