Question

An investor signed a contract to receive a $170,000 payment for the purchase of his warehouse in 5 years from today from the tenant who currently rents the warehouse. The tenant will continue to pay $20,000 rent at the beginning of each year with the first payment in one year from today. The investor's required rate of return is 10%. What is this deal presently worth to the investor? (hint, pay attention to the number of payments and when they occur, also would you pay rent when you own the property?)

A. $187,538

B. $194,574

C. $206,992

D. $214,443

Answer 1

Solution :-

Here we see the Payments are received at the end of the year for 5 Years

So we need to calculate the Present value of rent amount = Annutiy * PVAF(10% , 5 )

= $20,000 * [ 1 - ( 1 + 0.10)^-5 ] / 0.10

= $200,000 * 0.379

= $75,815.74

Now the Present Value of Purchase Amount

= $170,000 / ( 1 + 0.10 )⁵

= $170,000 * 0.6209

= $105,556.6

Therefore the deal is presently worth to the investor = $105,556.6 + $75,815.74 = $181,372.40

Therefore all the answer given in it are surely incorrect

But if we see the first option is nearest one to the answer

If there is any doubt please ask in comments

And i will check it on excel too , my answer is the correct one .