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.)

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.)

a. If the interest rate is 9%, what is the present value of the sales price? (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

 



b. Is the property investment attractive to you?



  
c-1. 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. (Do not round intermediate calculations. Enter your answer in millions rounded to 3 decimal places.)

c-2. Is the property investment attractive to you now?

 

Explanation
Some values below may show as rounded for display purposes, though unrounded numbers should be used for actual calculations.

a.

PV	=	FV / (1 + r)t
	=	$3,300,000 / 16
	=	$1,967,682.18, or $1.968 million

b.
The investment is not attractive because the present value of the sales price is less than the purchase price of the property.

c-1.

PV	=	Per-year rent × ((1 / r) – {1 / [r(1 + r)t]}) + Sales price / (1 + r)t
	=	$130,000 × ((1 / 0.09) – {1 / [0.09 (1.09)6]}) + $3,300,000.00 / 1.096
	=	$2,550,851.60, or $2.551 million

c-2.
The investment is attractive now because the present value of the future cash flows exceeds the current purchase price of the property.

Calculator computations:

a.

Enter

6

9

–3,300,000

N

I/Y

PV

PMT

FV

Solve for

1,967,682.18

c-1.

Enter

6

9

–130,000

–3,300,000

N

I/Y

PV

PMT

FV

Solve for

2,550,851.60