Final answer:
The NPV of the real estate investment is calculated by finding the present value of an indefinite series of annual cash flows, treated as a perpetuity, and subtracting the initial investment. By dividing the annual cash flow by the cost of capital, and then subtracting the purchasing price, the NPV is found to be -$2,449, indicating the investment might not be profitable.
Step-by-step explanation:
To calculate the investment's Net Present Value (NPV), you must discount the future cash flows back to their present value using the cost of capital and then subtract the initial investment. Given the annual cash flow of $127,000 will continue indefinitely, this implies a perpetuity. The present value of a perpetuity is calculated by dividing the annual cash flow by the discount rate, which in this scenario is 14.5%. Therefore, the present value of the cash flows is:
Present Value = Annual Cash Flow / Cost of Capital
Present Value = $127,000 / 0.145
Present Value = $876,551
After calculating the present value of the cash flows, we can determine the NPV by subtracting the initial cost of the investment from these cash flows:
NPV = Present Value - Initial Investment
NPV = $876,551 - $879,000
NPV = -$2,449
The NPV of the investment is -$2,449. Since the NPV is negative, it suggests that the investment would not meet the required return rate of 14.5%, and thus it may not be a profitable investment.