An apartment will generate $8,000 a year for 5 years, after which you expect to sell the property for $100,000. What is the maximum you should pay for the property if your cost of money is 10% ?
An apartment will generate $8,000 a year for 5 years, after which you expect to sell the property for $100,000. What is the maximum you should pay for the property if your cost of money is 10% ?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
An apartment will generate $8,000 a year for 5 years, after which you expect to sell the property for $100,000. What is the maximum you should pay for the property if your cost of money is 10% ?
Expert Solution
Step 1 Concept
Valuation of Property or Entity : The valuation of entity is the present value of inflow generation from the project and present value of sale value of property.
Step 2 Calculation of maximum price that should pay to buy
| Year | Cash Flow | PVF @ 10% | Present Value |
| 1 | 8000 | 0.909091 | 7272.727273 |
| 2 | 8000 | 0.826446 | 6611.570248 |
| 3 | 8000 | 0.751315 | 6010.518407 |
| 4 | 8000 | 0.683013 | 5464.107643 |
| 5 | 8000 | 0.620921 | 4967.370584 |
| 5 | 200000 (sale value of Property ) | 0.620921 | 124184.264612 |
| Value of property | 154510.5588 |
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