You plan to purchase an office space in Chamblee's Chinatown for $50,000 at the end of year 2021. You estimate that by renting out that office space, you will receive a stream of rental income for the coming eight years at the end of each year as shown in below. After eight years, you estimate that you can still sell the office space for $45,000 at the end of the eighth year. Is this project a good investment if you project that the normal rate of return in this line of business is 12%? How about if the general rate of return is 15% ? 8% ? Year 1 $6,000 Year 5 $7,500 Year 2 $6,500 Year 6 $8,500 Year 3 $7,000 Year 7 $8,500 Year 4 $7,500 Year 8 $8,500 Based on the information provided in Step 2 above, compute the Internal Rate of Return for the investment.
You plan to purchase an office space in Chamblee's Chinatown for $50,000 at the end of year 2021. You estimate that by renting out that office space, you will receive a stream of rental income for the coming eight years at the end of each year as shown in below. After eight years, you estimate that you can still sell the office space for $45,000 at the end of the eighth year. Is this project a good investment if you project that the normal rate of return in this line of business is 12%? How about if the general rate of return is 15% ? 8% ? Year 1 $6,000 Year 5 $7,500 Year 2 $6,500 Year 6 $8,500 Year 3 $7,000 Year 7 $8,500 Year 4 $7,500 Year 8 $8,500 Based on the information provided in Step 2 above, compute the Internal Rate of Return for the investment.
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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Transcribed Image Text:### Financial Problem Solving Exercises
1. **Office Space Investment:**
You plan to purchase an office space in Chamblee's Chinatown for $50,000 at the end of year 2021. You estimate that by renting out that office space, you will receive a stream of rental income for the coming eight years at the end of each year as shown below. After eight years, you estimate that you can still sell the office space for $45,000 at the end of the eighth year. Is this project a good investment if you project that the normal rate of return in this line of business is 12%? How about if the general rate of return is 15%? 8%?
| Year | Income |
|-------|----------------|
| Year 1| $6,000 |
| Year 2| $6,500 |
| Year 3| $7,000 |
| Year 4| $7,500 |
| Year 5| $8,000 |
| Year 6| $8,000 |
| Year 7| $8,500 |
| Year 8| $8,500 + $45,000|
2. **Internal Rate of Return:**
Based on the information provided in Step 2 above, compute the Internal Rate of Return for the investment.
3. **Lump Sum vs. Annuity Lottery Prize:**
While you were waiting for your first job interview results to come in, you spent several dollars to buy a Georgia Educational Lotto and were lucky enough to win a $1 million prize. The prize is to be awarded in 20 equal annual payments of $50,000 each, payable directly to your Bank of America account in Duluth at the end of the year each year. When the news of your winning was out, a person from Cash-Today-Enjoy-Now approached you immediately to offer you the option of receiving a lump sum payment of $400,000 right away, which you can invest in an IRA account that pays 12% compounded annually for the coming 20 years.
a. What is the present value of the $50,000 annuity? Use the projected 12% rate as the rate that the alternative IRA account will pay.
b. What should your decision be per the prize you win in lotto? Why?
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