Question

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.

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.