Question

Suppose that annual income from a rental property is expected to start at ​$1,250 per year...

Suppose that annual income from a rental property is expected to start at

​$1,250

per year and decrease at a uniform amount of

​$35

each year after the first year for the

16​-year

expected life of the property. The investment cost is

​$8,200​,

and i is

10​%

per year. Is this a good​ investment? Assume that the investment occurs at time zero​ (now) and that the annual income is first received at EOY one.

Homework Answers

Answer #1

We need to calculate the present value of the rental income as follows:

Year Rent i factor Present worth
1 1250 0.1 0.909091 1,136.36
2 1215 0.1 0.826446 1,004.13
3 1180 0.1 0.751315 886.55
4 1145 0.1 0.683013 782.05
5 1110 0.1 0.620921 689.22
6 1075 0.1 0.564474 606.81
7 1040 0.1 0.513158 533.68
8 1005 0.1 0.466507 468.84
9 970 0.1 0.424098 411.37
10 935 0.1 0.385543 360.48
11 900 0.1 0.350494 315.44
12 865 0.1 0.318631 275.62
13 830 0.1 0.289664 240.42
14 795 0.1 0.263331 209.35
15 760 0.1 0.239392 181.94
16 725 0.1 0.217629 157.78
8,260.06

As present value of the investment is greater than the investment cost so this is a good investment.

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