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The asking price of an asset is $750,000. It is an old building and will be...

The asking price of an asset is $750,000. It is an old building and will be demolished at the end of 10 years with the land worth $220,000 at that time. The expected annual cash flows for the next 10 years are $400,000 per year. Your required rate of return is 12%. What is the property worth to you today?
A. $1,436,505 B. $1,482,417 C. $1,336,366 D. $1,525,000

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Answer #1

The NPV of all these cash flows is the property worth to us.

NPV = PV of the land value + PV of the annual cash flows -The asking price

PV of the land value = 220,000/(1 + 0.12)^10

PV of the land value = $70,834.1120499532

PV of the annual cash flows:

The worth of property = 70,834.1120499532 + 2,260,089.21133333 - 750,000

The worth of property = $1,580,923.32338328

Option D is correct

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