Question

You can buy a property today for $4 million and sell it in 6 years for $5 million. You will not earn any rental income on the property. Answer the following questions. a.) If the interest rate is 5%, what is the present value of the sales price? _____________ (4 pts) b.) Is this a good investment for you? Explain your answer ____________________________ _______________________________________________________________________(4 pts) c.) If the interest rate is 5%, what is the present value of the sales price if you also earned $200,000 in rental income each year? _______________________________________________(4 pts)

Answer 1

a. Present value = $3,731,076.98

It is not a good investment because the present value of the sales price is less than the purchase price of the property. This means that purchasing the property would be unprofitable.

c. Present value = $4,746,215.40

Step-by-step explanation:

Present value is the sum of discounted cash flows

Present value can be calculated using a financial calculator

a. Cash flow each year from year 1 to 5 = 0

Cash flow in year 6 = $5,000,000

I = 5%

Present value = $3,731,076.98

It is not a good investment because the present value of the sales price is less than the purchase price of the property. This means that purchasing the property would be unprofitable.

c. Cash flow each year from year 1 to 5 = $200,000

cash flow in year 6 = $200,000 + $5,000,000 = $5,200,000

I = 5%

Present value = $4,746,215.40

To find the PV using a financial calculator:

1. Input the cash flow values by pressing the CF button. After inputting the value, press enter and the arrow facing a downward direction.

2. after inputting all the cash flows, press the NPV button, input the value for I, press enter and the arrow facing a downward direction.

3. Press compute