A property, if sold today, will provide the equity investor with $150,000 in cas
ID: 2793540 • Letter: A
Question
A property, if sold today, will provide the equity investor with $150,000 in cash flow after taxes. If the property is held, the annual after-tax cash flow received by the investor will be as follows: $18,000 for years 1 to 5, $24,000 for years 6 to 10. If held and sold in 10 years, the property is expected to provide $180,000 in after-tax cash flow to the investor. What should the investor do if she can receive a 18% rate of return by investing the sales proceeds today in a different project?
Can’t tell without knowing the cash flow from the second property
Renovate the property
Do not sell the property
Sell the property and invest proceeds in the second property
a.Can’t tell without knowing the cash flow from the second property
b.Renovate the property
c.Do not sell the property
d.Sell the property and invest proceeds in the second property
Explanation / Answer
NPV of selling today-holding it=+150000-18000/1.18-18000/1.18^2-18000/1.18^3-18000/1.18^4-18000/1.18^5-24000/1.18^6-24000/1.18^7-24000/1.18^8-24000/1.18^9-24000/1.18^10-180000/1.18^10
=26513.35
As we see NPV of selling today-holding it is greater than 0
Hence, we should sell the property today and invest the proceeds in second property
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