A property, if sold today. will provide the equity investor with $250,000 in cas

Question

A property, if sold today. will provide the equity investor with $250,000 in cash flow after taxes. If the property is held, the annual after-tax cash flow recieved by the investpr is expected to be $23,000 per years 1 to 5. If held and sold in 5 years. the propoerty is expcted to provide $300,000 in after-tax cash flow to the investor. What the investor do if she can recieve a 10% rate of return by investing the sales proceeds today in a different project? What is the anticipated rate of return if helf for 5 more years?

Explanation / Answer

A property, if sold today. will provide the equity investor with $250,000 in cash flow after taxes. If the property is held, the annual after-tax cash flow recieved by the investpr is expected to be $23,000 per years 1 to 5. If held and sold in 5 years. the propoerty is expcted to provide $300,000 in after-tax cash flow to the investor. What the investor do if she can recieve a 10% rate of return by investing the sales proceeds today in a different project?

1)Present Value of Property if it sold now = $ 250000

2) Present value of Property held for 5 year = 23000/1.10 + 23000/1.10^2 + 23000/1.10^3 + 23000/1.10^4 + 23000/1.10^5 + 300000/1.10^5

Present value of Property held for 5 year = $ 273,464.49

Decision : The investor should held the property for 5 year

What is the anticipated rate of return if helf for 5 more years?

Anticipated rate of Return = irr({-250000,23000,23000,23000,23000,323000})

Anticipated rate of Return = 12.33%

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