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Gina is interested in buying a house beside the university which she wikk rent to students....

Gina is interested in buying a house beside the university which she wikk rent to students. she expects to receive $1350 a month in rental income (net of maintenance). Ginas real estate agent estimates that she will be able to sell the property for $225,000 at the end of 29 months. Gina wants a return of 0.2% per month. what is the most that she should pay for the property? Assume that she will purchase the house today and recieve the first (beginning of month) rental payment today.

a) what is the most that Gina should pay for the property today? round to nearest dollar


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Answer #1
Maximum Amount that can be paid = Present value of all future expected Cashflows
Maximum Amount that can be paid = Present value of rentals and Sale Proceeds
Maximum Amount that can be paid = [$1,350 * PVAFdue(0.2%,29 Months)] + [$225,000 * PV(0.2%,29 Months)]
PV of Annuity Due = $1,350*((1-(1/(1+0.02%)^29))/0.02%)*(1+0.02%)
PV of Annuity Due = $39,040.60
PV of Sale Proceeds = $ 225,000 * (1+0.02%)^(-29)
PV of Sale Proceeds = $ 223,698.91
Maximum Amount that can be paid = [$1,350 * PVAFdue(0.2%,29 Months)] + [$225,000 * PV(0.2%,29 Months)]
Maximum Amount that can be paid = $262,739.51
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