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Anna is thinking about making an improvement to her home. This modification will cost $10,000, but...

Anna is thinking about making an improvement to her home. This modification will cost $10,000, but it will also increase the value of the home by $10,000 when Anna plans to sell it in 10 years. The market interest rate is 10%.

A. What is the present value of the increased value of the home due to the improvement?

B. What is the minimum amount at which Anna must personally value the improvement to be willing to go through with it?

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Answer #1

Ans.
a) Present value of $10000 at interest rate of 10% for 10 years,

PV = 10000/(1+0.1)^10

=> PV = $3855.433

So, the present value of the increased value of the home due to improvements is $3855.433

b) The minimum amount at which Anna should personally value the improvement is $3855.433 because if she values the improvement less than this amount then the net present value of this investment will become negative i.e. she will be incurring a loss effectively.

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