You can buy property today for $3.2 million and sell it in 4 years for $4.2 million.
(You earn no rental income on the property.)
a.If the interest rate is 8%, what is the present value of the sales price? (Do not
round intermediate calculations. Enter your answer in millions rounded to
3 decimal places.)
Present 3.087 ± 1%
value$ million
b.Is the property investment attractive to you?
No
c-1.What is the present value of the future cash flows, if you also could earn
$220,000 per year rent on the property? The rent is paid at the end of each
year. (Do not round intermediate calculations. Enter your answer in
millions rounded to 3 decimal places.)
Present 3.816 ± 1%
value$ million
c-2.Is the property investment attractive to you now?
Yes
Some values below may show as rounded for display purposes, though unrounded
numbers should be used for actual calculations.
a.
P = FV / (1 + r)t
V
= $4,200,000 / 1.084
= $3,087,125.38, or $3.087 million
b.
The investment is not attractive because the present value of the sales price is less
than the purchase price of the property.
c-1.
P = Per-year rent × ((1 / r) – {1 / [r(1 + r)t]}) + Sales price / (1 + r)t
V
= $220,000 × ((1 / .08) – {1 / [.08 (1.08)4]}) + $4,200,000 / 1.084
= $3,815,793.29, or $3.816 million
c-2.
The investment is attractive now because the present value of the future cash flows
exceeds the current purchase price of the property.
Calculator computations:
a.
Enter48 –4,200,000
Explanation:
Solve
for
c-1.
Enter
Solve
for
4
N
8
3,087,125.38
PV
3,815,793.29
–220,000
PMT
–4,200,000
FV
NI/Y
I/Y
PV PMT
FV
