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rusak2 [61]
3 years ago
11

An investor agreed to sell a warehouse five years from now to the tenant who currently rents the space. The tenant will continue

to pay $20,000 rent at the end of each year including year 5 in which he will purchase the building for an additional $150,000. Assuming the investor's required rate of return is 10%, how much is this deal presently worth to the investor who was willing to sell?
Business
1 answer:
salantis [7]3 years ago
4 0

Answer:

Net present value of $168,953.93

Explanation:

We will calculate the present value of the cash flow at the investor's rate of return.

First we have the annuity of 20,000 during 5 years

C \times \frac{1-(1+r)^{-time} }{rate} = PV\\

C = 20,000

time = 5

rate = 10

20,000 \times \frac{1-(1+0.10)^{-5} }{0.10} = PV\\

PV = 75,815.73539

Then we calculate the present value of the final payment of 150,000

\frac{Nominal}{(1 + rate)^{time} } = PV

Nominal = 150,000

rate = 0.1

time = 5

\frac{150,000}{(1 + 0.10)^{5} } = PV

PV = 93,138.198459

<u>We add both together: </u>And get the present value

75,815.73 + 93,138.20 = 168,953.93

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