Question

A real estate investor likes to "Tlip" houses. That is, he likes to buy a house at a low price and then "fip" or sell the house for a higher price. The investor is looking at a foreclosed house that will cost $231,602.00 today. He will invest an additional $48,010.00 in the first year of owning the house to upgrade its features. He then believes he can sell the house for $443,510.00 at the end of the second year. What is the NPV of this investment if our investor wants to earn a 14.00% annual retum on the house?

Answer 1

The NPV of this real estate investment is $103,573.63.

Step-by-step explanation:

The NPV (Net Present Value) of an investment calculates the value of the investment in today's dollars by discounting future cash flows at a specified rate of return. To find the NPV of this real estate investment, we need to calculate the present value of the cash inflows and outflows.

First, let's calculate the present value of the initial investment and the cash inflows from selling the house in year 2:

• The initial investment of $231,602 today has a present value of $231,602/(1+0.14)^1 = $202,860.53.
• The cash inflow from selling the house for $443,510 in year 2 has a present value of $443,510/(1+0.14)^2 = $348,575.21.

Next, we calculate the present value of the upgrade cost in year 1:

• The cash outflow of $48,010 in year 1 has a present value of $48,010/(1+0.14)^1 = $42,141.05.

Finally, we calculate the NPV by subtracting the total present value of cash outflows from the total present value of cash inflows:
NPV = $348,575.21 - ($202,860.53 + $42,141.05) = $103,573.63.