You can buy property today for $2.9 million and sell it 5 years for $3.9 million

Question

You can buy property today for $2.9 million and sell it 5 years for $3.9 million. (You earn no rental income on the property.) a. If the interest rate is 8%, what is the present value of the sales price? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.) Present value $ million b. Is the property investment attractive to you? Yes No What is the present value of the future cash flows, if you also could earn $190,000 per year rent on the property? The rent is paid at the end of each year. (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.) Present values $ million Is the property investment attractive to you now? Yes No

Explanation / Answer

a. Present vaue of the property=Cash inflow*Present value of 5th year @8%=$3.9 million*1/(1+0.08)5

=$3,900,000*0.6806=$2,654,340

b.No, The property is not attractive.

c-1

c-2

Yes, the property is attractive.

PV value of the project: Particulars Year Cash flow Pv@8% PV Rent 1 190,000      0.9259     175,925.93 Rent 2 190,000      0.8573     162,894.38 Rent 3 190,000      0.7938     150,828.13 Rent 4 190,000      0.7350     139,655.67 Rent 5 190,000      0.6806     129,310.81 Sale price 5 3,900,000      0.6806 2,654,274.47 3,412,889.38

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