13. You consider developing a rental apartment complex. It will cost you $1000,0
ID: 2818961 • Letter: 1
Question
13. You consider developing a rental apartment complex. It will cost you $1000,000 per year for the next 2 years to build it, and $20,000 per year for maintenance starting the third year. The revenue will be $152,000 per year. What is the NPV of this project if the interest rate is 6%, and your planning horizon is infinite?
14. What is the fraction of housing in the assets of a typical US household? (1) 10%, (2) 30 %, (3) 50%, (4) 75%. Syntax: if your answer is (1) 10%, enter 1, not (1), and not 10%. Comment: you never need to remember the exact numbers (numbers change, estimates vary, you can always look up), but it is useful to know the approximate magnitudes for qualitative understanding (e.g. 10% and 50% in this question imply very different qualitative characteristics of the housing market) and for back of the envelope calculations w/o looking up every single number.
15. How large was the decline in house prices during the housing bust of 2007-12? Pick the closest number: (1) 10%, (2) 30%, (3) 50%, (4) 75%.
Explanation / Answer
13:
Pv of cash flows at time 3= Annual cash flow/rate
=(152000-20000)/ 0.06 = 2200,000
NPV= CF1/(1+r)^1+ CF2/(1+r)^2+CF3/(1+r)^3
= - 1000000/1.06 – 1000000/1.06^2+ 2200000/1.06^3
=13769.76
14: 75%
As per the Census Bureau, it is around 63+7=70% equity in own home+ other housing assets
15: 50%
As per the Fed Economic Symposium in Jackson Hole, the deline was close to 50%
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