Question

Ashley projects that she can get $100,000 cash per year for 5 years on a real estate investment project. If Ashley wants to earn a rate of return of 12%, what is the maximum that she should pay for the investment? (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided. Round your answer to the nearest dollar.)

Answer 1

Answer: To calculate the maximum price that Ashley should pay for the investment, we need to determine the present value of the cash flows that she expects to receive over the next 5 years.

Explanation: We can use the present value of an annuity formula, which is:PV = Payment x [(1 - (1 + r)^(-n)) / r] where:Payment = $100,000 (the annual cash flow) r = 12% (the rate of return) n = 5 (the number of years)

Using the PVA of $1 table, we can find that the factor for 5 years at 12% is 3.6048.Substituting these values into the formula, we get:PV = $100,000 x [(1 - (1 + 0.12)^(-5)) / 0.12]

PV = $363,105.59Therefore, the maximum that Ashley should pay for the investment is $363,106 (rounded to the nearest dollar).