Question

# Question 8: uppose a certain property is expected to produce net operating cash flows annually as...

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

 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

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