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10.       Suppose a firm is interested in purchasing the following income producing property at a current...

10.       Suppose a firm is interested in purchasing the following income producing property at a current market price of $450,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: Year 1 = $40,000, Year 2 = $45,000, Year 3 = $50,000, Year 4 = $55,000. Assuming that the required rate of return is 12% and the estimated proceeds from selling the property at the end of year four is $500,000, what is the NPV of the project?
a.   $8,829.96
b.   $9,889.56

c.   $11,658.65
d.   $428,113.65
e.   $459,889.56

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Answer #1
Discount rate 12.000%
Year 0 1 2 3 4
Cash flow stream -450000 40000 45000 50000 555000
Discounting factor 1.000 1.120 1.254 1.405 1.574
Discounted cash flows project -450000.000 35714.286 35873.724 35589.012 352712.534
NPV = Sum of discounted cash flows
NPV Property = 9889.56
Where
Discounting factor = (1 + discount rate)^(Corresponding period in years)
Discounted Cashflow= Cash flow stream/discounting factor
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