Question

a piece of real estate will generate annual cash flow of $127,000. the first cash flow occurs one year from today and subsequent annual cash flows will continue indefinitely. if you can purchase the property for $808,000 today and your cost of capital is 12.7%, what is the investment's npv? round your answer to the nearest dollar. be sure to enter a negative sign (-) if your answer is a negative number.

Answer 1

The Net Present Value (NPV) of the investment can be calculated by discounting the future cash flows at the cost of capital. The NPV for year one is $112,395, and the NPV for subsequent years is $1,000,000. The NPV represents the profitability of the investment.

Step-by-step explanation:

The Net Present Value (NPV) is a financial calculation used to determine the profitability of an investment. To calculate the NPV, we need to discount the future cash flows at the given cost of capital. In this case, the annual cash flow is $127,000, and the cost of capital is 12.7%. Let's calculate the NPV step by step:

Calculate the present value factor for each year by dividing 1 by (1 + cost of capital) to the power of the year. For example, for year one, the present value factor is 1 / (1 + 0.127) = 0.885.

Multiply the annual cash flow for each year by its respective present value factor. For year one, the present value would be $127,000 * 0.885 = $112,395.

Sum up all the present values for all the years to get the NPV. $112,395 is the NPV for year one.

Repeat the steps for subsequent years to calculate the NPV for each year. Since the cash flows are indefinite, you can use the formula NPV = (Annual Cash Flow / Cost of Capital) to calculate the NPV without using an infinite sum. In this case, the NPV would be ($127,000 / 0.127) = $1,000,000.