Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Question
. You can buy property today for $2.3 million and sell it in 6 years for $3.3 million. (You earn no rental income on the property.)
- If the interest rate is 9%, what is the
present value of the sales price?
- Formula
- PV = C / (1 + r)n
- PV = 3.3 / (1 + 9%)6
- PV = 3.3 / (1.09)6
- PV = 1,967,682.18
- Is the property investment attractive to you?
- I am paying 2.3 million for the property and it is currently worth 1.9 million. I don’t care for paying more for what it is currently worth today. However, if I kept the land for 6 years, I could sell it for 3.3 million. That would be a net profit of 1 million. Yes, it is attractive to me.
- What is the present value of the future cash flows, if you also could earn $130,000 per year rent on the property? The rent is paid at the end of each year.
- Formula:
- FVn = C x (1 + r)n
- FVn = 130k x (1.09)6
- FVn = 218,023.01 + 780,000 (130 x 6 years)
- FVn = 998,023.01 additional
- 998,023.01 + 3,300,000 = 4,298,023.01
- Is the property investment attractive to you now?
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