a. suppose that your required rate of return on a duplex is 12 percent. you are
ID: 2613237 • Letter: A
Question
a. suppose that your required rate of return on a duplex is 12 percent. you are shown one such property which has a n asking price of 30000. the sales representative shows you the following cash flow projections for a holding period of 6 years
should you buy the investment? what would your expected rate of return?
b. what is the net present value of the duplex investment if the asking price is 28000 and your required rate of return is 12 percent? 10 percent? 15 percent?
year cash flow 1 4500 2 5000 3 6000 4 3000 5 8000 6 20000Explanation / Answer
Statement showing calculation of NPV Particulars Time PVF@12% Amount PV(Amount *PVF) Cash outflows - 1.000 (30,000.00) (30,000.00) PV of Cash outflows (30,000.00) Cash inflows 1.000 0.8929 4,500.00 4,017.86 Cash inflows 2.000 0.7972 5,000.00 3,985.97 Cash inflows 3.000 0.7118 6,000.00 4,270.68 Cash inflows 4.000 0.6355 3,000.00 1,906.55 Cash inflows 5.000 0.5674 8,000.00 4,539.41 Cash inflows 6.000 0.5066 20,000.00 10,132.62 PV of Cash inflows 28,853.10 NPV (1,146.90) No we should not buy investment as NPV is negative Statement showing calculation of NPV Particulars Time PVF@12% Amount PV(Amount *PVF) Cash outflows - 1.000 (28,000.00) (28,000.00) PV of Cash outflows (28,000.00) Cash inflows 1.000 0.8929 4,500.00 4,017.86 Cash inflows 2.000 0.7972 5,000.00 3,985.97 Cash inflows 3.000 0.7118 6,000.00 4,270.68 Cash inflows 4.000 0.6355 3,000.00 1,906.55 Cash inflows 5.000 0.5674 8,000.00 4,539.41 Cash inflows 6.000 0.5066 20,000.00 10,132.62 PV of Cash inflows 28,853.10 NPV 853.10 Statement showing calculation of NPV Particulars Time PVF@10% Amount PV(Amount *PVF) Cash outflows - 1.000 (28,000.00) (28,000.00) PV of Cash outflows (28,000.00) Cash inflows 1.000 0.9091 4,500.00 4,090.91 Cash inflows 2.000 0.8264 5,000.00 4,132.23 Cash inflows 3.000 0.7513 6,000.00 4,507.89 Cash inflows 4.000 0.6830 3,000.00 2,049.04 Cash inflows 5.000 0.6209 8,000.00 4,967.37 Cash inflows 6.000 0.5645 20,000.00 11,289.48 PV of Cash inflows 31,036.92 NPV 3,036.92 Statement showing calculation of NPV Particulars Time PVF@15% Amount PV(Amount *PVF) Cash outflows - 1.000 (28,000.00) (28,000.00) PV of Cash outflows (28,000.00) Cash inflows 1.000 0.8696 4,500.00 3,913.04 Cash inflows 2.000 0.7561 5,000.00 3,780.72 Cash inflows 3.000 0.6575 6,000.00 3,945.10 Cash inflows 4.000 0.5718 3,000.00 1,715.26 Cash inflows 5.000 0.4972 8,000.00 3,977.41 Cash inflows 6.000 0.4323 20,000.00 8,646.55 PV of Cash inflows 25,978.08 NPV (2,021.92)
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