Question

As a financial advisor, what will you tell your client, Ryan, he should be willing to pay for an investment property that he plans to buy today and hold for 5 years and then sell, given the following cash flows and the fact that he expects 10% on any investment he makes?


Inflows Outflows Net
Initial Outlay $0
Year 1 $45,000(Inflow) $55,000(Outflow) -$10,000(Net)
Year 2 $55,000(Inflow) $20,000(Outflow) $35,000(Net)
Year 3 $55,000(Inflow) $20,000(Outflow) $35,000(Net)
Year 4 $255,000(Inflow) $35,000(Outflow) $220,000(Net)

$189,910.29.

$196,393.69

$203,164.46

$210,238.30

Answer 1

$196,393.69

As per discounted cash flow, value of property is the present value of future cash flow .

So, Property should be purchased at above price.

Year	Net Cash Flow	Discount factor	Present Value
a	b	c=1.10^-a	d=b*c
1	$       -10,000	0.909091	$     -9,090.91
2	$         35,000	0.826446	$     28,925.62
3	$         35,000	0.751315	$     26,296.02
4	$     2,20,000	0.683013	$ 1,50,262.96
	Total		$ 1,96,393.69