Question

You can buy property today for $3.1 million and sell it in 6 years for $4.1...

You can buy property today for $3.1 million and sell it in 6 years for $4.1 million (you earn no rental income on the property)

a. if the interest is 7%, what is the present value of the sales price?

b. is the property investment attractive to you?

c. what is the present value of the future cash flows, if you could also earn $210,000 per year rent on the property? The rent is paid at the end of each year.

d. is the property investment attractive to you now?

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Homework Answers

Answer #1

a. PV = FV/(1 + r)^n

PV = 4,100,000/(1 + 0.07)^6

PV = $2,732,003.1176477

b. No, the investment is not attractive because the cost of the property $3.1 million is greater than the present value of the selling price of $2.73 million

c. PV of the future cash flows = PV of the selling price + PV of the rental income

PV of the rental income,

PV of the future cash flows = 2,732,003.1176477 + 1,000,973.3286

PV of the future cash flows = $3,732,976.4462477

d. Yes, the property investment is attractive now because the PV of future cash flows > the cost of the property

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