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You can buy property today for $2
You can buy property today for $2.6 million and sell it in 6 years for $3.6 million. (You earn no rental income on the property.)
a. If the interest rate is 6%, what is the present value of the sales price? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)
b. Is the property investment attractive to you?
c-1. What is the present value of the future cash flows, if you also could earn $160,000 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.)c-2. Is the property investment attractive to you now?
Expert Solution
a) Computation of Present Value of Sales Price:
Present Value = Future Value/(1+Rate)^Time
= $3.6 million/(1+6%)^6
= $3.6 million/1.4185
Present Value = $2.54 million
b) Since cost is higher than the Present Value of sales value which will result in Loss and hence the property investment is not an attractive one.
c) Computation of Present Value using PV Function in Excel:
=-pv(rate,nper,pmt,fv)
Here,
PV = Present Value = ?
Rate = 6%
NPER = 6 Years
PMT = $160,000 or $0.16 million
FV = $3.6 million
Substituting the values in formula:
=-pv(6%,6,0.16,3.6)
PV or Present Value = $3.325 million
Since cost is lower than the Present Value of sales value which will result in profit and hence the property investment is an attractive one.
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