Question

Suppose you invest (through a loan) $250,000 in purchasing a building which pays gross returns of $30,000 every year (beginning 2020) for 10 years. Do a CBA to determine if this is optimal investment for you, who is going to be unemployed at the end of next year

Answer 1

ANSWER:

GIVEN THAT:

THROUGH A LOAN THE PERCENT IS TAKING 7% INTEREST RATE:

1. Initial cost on purchasing building (I) = $250,000

2. Annual return from the building (A) =$30000

Life of the building (N) = 10 years

Rate of interest (i) = 7%

Present worth of the benefit = $30000 (P/A,7%,10) =$30000 (7.02358) =$210707.4

Present worth of the cost = $250,000

3. Benefit/Cost ratio = Present worth of the benefit/ Present worth of the cost =$210707.4/$250000=0.8428 or approx 0.84

4. Thought the Benefit/Cost ratio = 0.84, which is less than 1. So it is not an optimal investment

purchasing the building is not an optimal investment