An analyst is evaluating a real estate investment project using the discounted cash flow approach. The purchase

Question:

An analyst is evaluating a real estate investment project using the approach. The purchase price is $3 million, which is financed 15 percent by equity and 85 percent by a mortgage loan. It is expected that the property will be sold in five years. The analyst has estimated the following after-tax cash flows during the first four years of the real estate investment project.

For the fifth year, that is, the year when the property would be sold by the investor, the after-tax cash flow without the property sale is estimated to be $126,000 and the after-tax cash flow from the property sale is estimated to be $710,000.
Compute the NPV of this project. Slate whether the investor should undertake the project. The investor's cost of equity for projects with level of risk comparable to this real estate investment project is 18 percent.

Discounted Cash Flows
What is Discounted Cash Flows? Discounted Cash Flows is a valuation technique used by investors and financial experts for the purpose of interpreting the performance of an underlying assets or investment. It uses a discount rate that is most... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...