Question

Jose is thinking of purchasing a small real estate project. The listing price (asking price) is $200,000. Jose’s best estimate of the after-tax cash flows is $30,000 in years 1-5 and $36,000 in years 6-10. Also, he plans to sell the property at the end of 10 years for $300,000 after tax. If Jose requires a 16 rate of return on his real estate investments, what is this project worth (present value) to him in today’s dollars? Should Jose purchase, does he make or lose money if he purchases? Do not use excel.

Answer 1

The NPV is computed as shown below:

= Initial investment + Present value of future cash flows

Present value is computed as follows:

= Future value / (1 + r)ⁿ

So, the NPV is computed as follows:

= - $ 200,000 + $ 30,000 / 1.16¹ + $ 30,000 / 1.16² + $ 30,000 / 1.16³ + $ 30,000 / 1.16⁴ + $ 30,000 / 1.16⁵ + $ 36,000 / 1.16⁶ + $ 36,000 / 1.16⁷ + $ 36,000 / 1.16⁸ + $ 36,000 / 1.16⁹ + $ 36,000 / 1.16¹⁰ + $ 300,000 / 1.16¹⁰

= $ 22,355.51 Approximately

Since the NPV of the project is positive, hence he shall purchase it.

If we purchases it, he shall make money equivalent to $ 22,355.51 Approximately

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