Question

You can buy property today for $2.2 million and sell it in 5 years for $3.2 million. (You earn no rental income on the property.) a. If the interest rate is 10%, what is the present value of the sales price?

Answer 1

PV of the sales price $1,986,948.23

Step-by-step explanation:

We will calcualte the present value of the sale price using the present value of a lump sum formula:

`(Maturity)/((1 + rate)^(time) ) = PV`

Maturity 3,200,000

time 5 years

rate 10% = 10/100 = 0.1

`(3200000)/((1 + 0.1)^(5) ) = PV`

PV $1,986,948.2338

This indicates the 3,200,000 in five years are equivalent to 1,986,948.23 dollars Thus, this investment is not profitable as the property will be purchased at 2,200,000