Question

economics q solve within 30 mins

A landlord is evaluation his investment in a new residential apartment building. According to his evaluation, internal rate of return on this investment is 8% if (i) annual rent is $40,000 for 10 years and (ii) resale value of the building is 15% of the initial value at the end of the 10th year. What is the purchase price of the building?

(Round your answer to 2 decimal places and don't include the $ sign in your answer)

show all steps. be clear and will rate right away :)

Answer 1

ANSWER:

I = 8%

N = 10 YEARS

let the purchase price be x.

resale value at the end of 10th year = 15% of purchase price = 15% * x = 0.15x

annual rent = $40,000

in order to find the purchase price the w will be equated to zero.

pw = purchase price + annual rent(p/a,i,n) + resale value(p/f,i,n)

0 = -x + 40,000(p/a,8%,10) + 0.15x(p/f,8%,10)

0 = -x + 40,000 * 6.71 + 0.15x * 0.4632

0 = -x + 268,400 + 0.06948x

0 = -0.93052x + 268,400

0.93052x = 268,400

x = 268,400 / 0.93052

x = 288,440.87

so the purchase price is 288,440.87