Question

You can buy property today for $2.5 million and sell it in 7 years for $3.5 million. (You earn no rental income on the property.) a. If the interest rate is 7%, what is the present value of the sales price? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

Answer 1

The present value of the sales price of the property is $2.179 million when the discount rate is 7%.

Step-by-step explanation:

The present value of the sales price of the property, given the interest rate is 7%, can be calculated using the formula for present value (PV) of a single future amount:

PV = FV / (1 + r)n

Where:

• FV is the future value ($3.5 million)
• r is the interest rate (7% or 0.07)
• n is the number of years (7 years)

Plugging the values in the formula we get:

PV = $3.5 million / (1 + 0.07)7

Calculating the denominator:

(1 + 0.07)7 = (1.07)7 = 1.6057814765

Now divide the future value by this number:

PV = $3.5 million / 1.6057814765

PV = $2.179 million (rounded to three decimal places)

The present value of the property is $2.179 million when the interest rate is 7%.