Question

Question 8: uppose a certain property is expected to produce net operating cash flows annually as follows, at the end of each of the next five years: $35,000, $37,000, $45,000, $46,000, and $40,000.  In addition, at the end of the fifth year we will assume the property will be (or could be) sold for $400,000, what is the highest price you would be willing to pay for this property? (ie. at what price does the net present value equal zero? ie. at what price is the IRR equal to the discount rate?)

A

$400,044

B

$400,000

C

$400,049

D

$375,000

Answer 1

year	cash flow
0	-400000
1	35000
2	37000
3	45000
4	46000
5	440000
IRR = Using IRR function in MS excel =IRR(-400000,35000,37000,45000,47000,440000)	10.0542%
year	cash flow	present value of cash flow = cash flow/(1+r)^n r= 10.0542%
0
1	35000	31802.51
2	37000	30548.4
3	45000	33759.24
4	46000	31356.77
5	440000	272533.3
Maxium price for the project at IRR rate	sum of present value of cash flow	400000.2