Answer:
a) $2, 654,000 or approximately $2.654 million
b) The investment is not attractive because the present value of the future cash flow at $2.654 million is less than the investment of $2.9 million
c) $3.413 million approximately
d) This property is attractive as the present value of $3.413 is higher than the investment of $2.9 million
Explanation:
The A part of the questions is to determine the present value of property
Information given
Future value = $3.9 million
Interest rate = 8%
The period = 5 years
The present value formula = Future value / (1+r)∧n
= $3,900,000 / 1.08∧5
= 2,654,274.46843163
= $2, 654,000 or approximately $2.654 million
b) Is the property attractive...
The investment is not attractive because the present value of the future cash flow at $2.654 million is less than the investment of $2.9 million
c) Compute a new present value based on cash flow of $190,000
The present value
= 190,000/ 1.08∧1 + 190,000/ 1.08∧3 + 190,000/ 1.08∧3 + 190,000/ 1.08∧4 +190,000/ 1.08∧5 + 3,900,000/ 1.08∧5
= 175,929.93 + 162,894.38 + 150,828.13 + 139,655.67 + 129,310.81 + 2,654,274.47= 3,412,889.38
= $3.413 million approximately
d) This property is attractive as the present value of $3.413 is higher than the investment of $2.9 million
