You are considering the purchase of a small retail shopping complex that will generate net cash flows each of the next 20 years, starting at $500,000 in Year 1. You normally demand a 12% rate of return on such investments. Future cash flows after year 1 are expected to grow with inflation at 5% per year. How much would you be willing to pay for the complex today if it will have to be torn down in 20 years, and the land could be sold for a net amount of $3 million in year 20?
You are considering the purchase of a small retail shopping complex that will generate net cash flows each of the next 20 years, starting at $500,000 in Year 1. You normally demand a 12% rate of return on such investments. Future cash flows after year 1 are expected to grow with inflation at 5% per year. How much would you be willing to pay for the complex today if it will have to be torn down in 20 years, and the land could be sold for a net amount of $3 million in year 20?
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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You are considering the purchase of a small retail shopping complex that will generate net
cash flows each of the next 20 years, starting at $500,000 in Year 1. You normally
demand a 12% rate of
expected to grow with inflation at 5% per year. How much would you be willing to pay
for the complex today if it will have to be torn down in 20 years, and the land could be
sold for a net amount of $3 million in year 20?
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