Question

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?

Answer 1

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

We add both together: And get the present value

75,815.73 + 93,138.20 = 168,953.93