Question

As a financial advisor, what will you tell your client, Ryan, he should be willing to pay for an investment property that he plans to buy today and hold for 5 years and then sell, given the following cash flows and the fact that he expects 9% on any investment he makes?

Inflows Outflows Net
InitialOutlay $0
Year 1 $45,000 $55,000 10,000
Year 2 55,000 20,000 35,000
Year 3 55,000 20,000 35,000
Year 4 255,000 235,00 220,000
A. $189, 910.29.
B. $194, 589.33.
C. $178, 656, 73.
D. $191, 231, 57.

Answer 1

The option (A) $189, 910.29 is correct

Step-by-step explanation:

Solution

Given that

Years Net Cash flow Discount Factor at 11% Present Value

1 $ (10,000.00) 0.901 $(9,009.01)

2 $ 35,000.00 0.812 $ 28,406.79

3 $ 35,000.00 0.731 $ 25,591.70

4 $ 220,000.00 0.65 $ 144,920.81

Now,

The Net Present Value $189,910.29

Thus

After carrying out the financial analysis, it has been seen that if we go ahead to buy the Investment Property, then today we have Net present Value of $ 189,910.29.

So, i will inform my client to buy the Investment Property.