Question
1. You are considering the purchase of an apartment complex that will generate today a net cash flow of $500,000 per year. You normally demand
1. You are considering the purchase of an apartment complex that will generate today a net cash flow of $500,000 per year. You normally demand a 5 percent rate of return on such investments. Future cash flows are expected to grow with inflation at 2 percent per year. How much would you be willing to pay for the complex if it:
- Will produce cash flows forever?
- Will have to be torn down in 10 years? Assume that the site will worth $3 million at that time net of demolition costs.
Now calculate the real discount corresponding to the 5 percent nominal rate. Redo the calculations for parts (a) and (b) using real cash flows. (your answers should not change.)
Please provide answers and show work, thank you very much!
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