Question

What is the present value of a property that can be bought today for $2.5 million and sold in 7 years for $3.5 million, assuming no rental income, with an interest rate of 7%?

a. $2.18 million

b. $2.61 million

c. $2.98 million

d. $3.27 million

Answer 1

The present value of a property that can be bought for $2.5 million and sold in 7 years for $3.5 million, with a 7% interest rate, is approximately $2.18 million.

Step-by-step explanation:

Present Value Calculation

To calculate the present value of the property, we need to discount the future value ($3.5 million) using the given interest rate (7%) over the given period of time (7 years). The formula for present value (PV) is as follows:

PV = FV / (1 + r)^n

Where:

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

Substituting the values into the formula:

PV = $3,500,000 / (1 + 0.07)^7

Calculating this gives us a present value of approximately:

PV = $3,500,000 / (1.07)^7 = $3,500,000 / 1.605781 = approximately $2.18 million

Therefore, the present value of the property is about $2.18 million, which corresponds to option (a).