Question

Suppose you own a small company that is contemplating construction of a suburban office block. The cost of buying the land and constructing the building is $700,000. Your company has cash in the bank to finance construction. Your real estate adviser suggests that you rent out the building for two years at $30,000 a year and predicts that at the end of that time you will be able to sell the building for $840,000.

Thus there are now two future cash flows--a cash flow of C₁ = $30,000 at the end of year 1 and a further cash flow of C₂ = ($30,000 + 840,000) = $870,000 at the end of the second year.

a. Calculate the NPV of the office building venture at interest rates of 5, 10, and 15%. (Do not round intermediate calculations. Round your answers to 2 decimal places.)

Net present value at 5%	$
Net present value at 10%	$
Net present value at 15%	$

b. At what discount rate (approximately) would the project have a zero NPV? Check your answer by calculating the NPV at your approximate rate; it should be close to zero. (Enter your answer as a percent rounded to the nearest whole number.)

Approximate discount rate             %

Answer 1