Question

The acquisition value of an investment property is € 5,000, which is known to be in the next
achieved an annual surplus of € 1,000 per year for five years. At the end of these five years a
Liquidation proceeds of € 1,000. If the investment is based on an interest rate of 10%
advantageous?

Answer 1

To find whether an acquisition is advantageous or not, we can find the net present value.

Net present value = Present value of cash inflows - present value of cash outflows

Net present value = Annuity * [1 - 1 / (1 + r)^n] / r + FV / (1 + r)^n - Initial investment

Net present value = 1000 * [1 - 1 / (1 + 0.1)^5] / 0.1 + 1000 / (1 + 0.1)^5 - 5,000

Net present value = 1,000 * [1 - 0.620921] / 0.1 + 620.921323 - 5,000

Net present value = 1,000 * 3.790787 + 620.921323 - 5,000

Net present value = -588.29

The investment will NOT be advantageous as the net present value will be negative. A negative net present value will decrease the net worth of the investor.