Sairah purchased an investment property for $550,000, 2 years ago. The after-tax

Question

Sairah purchased an investment property for $550,000, 2 years ago. The after-tax cashflow of the property has been $55,000 per year to date, but market conditions have improved and Sairah expects the cashflow to improve to $108,000 per year for the next 15 years (assume these are year end cashflows and the property will be worthless thereafter). The annual cost of capital (or cap rate) for this area is 5%. What is the value of the property today? (Enter just the number in dollars without the $ sign or a comma and round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $31.)

Explanation / Answer

Value of the property today is the present value of future cashflows:

PV = FV/(1+r)^n

PV = 108000/(1+0.05)^1 + 108000/(1+0.05)^2 + 108000/(1+0.05)^3 + 108000/(1+0.05)^4 + 108000/(1+0.05)^5 + 108000/(1+0.05)^6 + 108000/(1+0.05)^7 + 108000/(1+0.05)^8 + 108000/(1+0.05)^9 + 108000/(1+0.05)^10 + 108000/(1+0.05)^11 + 108000/(1+0.05)^12 + 108000/(1+0.05)^13 + 108000/(1+0.05)^14 + 108000/(1+0.05)^15 = $1121003.07

Present value = $1121003

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