C$)$ Cabin MUST PROVIDE EXCEL FORMULA YOU USED TO COMPLETE NPV AT $5\%$ and $10\%$ along WITH IRR

Mrs$.$ Smith inherited a cabin from her parents plus $$100,000$ in cash. The cabin needs a complete remodel that will cost $$100,000.$

They rent the cabin out when they are not using it$.$ Rent is collected by a management firm, netted against expenses and paid to

the Smith's semi annually. The Smiths want to use their inheritance to fund their children's education. Mrs$.$ Smith can sell the

cabin now in its current condition for $$50,000($after taxes$)$ and invest the proceeds and the $$100,000$ at $5\%.$ She could also make

the improvements to the cabin and wait to sell it when her children are ready to go to school. She would prefer to make the

the improvements and wait so the family can use the cabin as long as the proceeds from selling the cabin later exceeds selling it now and

investing proceeds. See cash flows below.

Calculate the following

Net Present Value at $5\%$

Net Present Value at $10\%$

IRR

Should she sell it now or later and why? I believe that since the NPV at $5\%$ is positive $$102,770,$ and the IRR $8\mathrm{.}4\%$ is higher than the currect rate of $5\%$: It is better to keep and remodel the cabin rather than selling it now.

If she could earn $10\%$ on the investment by selling selling the cabin now and investing the proceeds at $10\%$ would be better.

now what would you recommend?

What is the interest rate she would have to earn $8\mathrm{.}40\%$

in order to make it better to sell now?

Expected Cash Flows:

Remodel $1/1/2015(150,000)<$ the $$100,000$ remodel cost plus the value of the cabin

Pay insurance & property Tax $1/26/2015(2,500)$

Rent Payment $6/30/20155,000$

Rent Payment $12/27/20155,000$

pay insurance & property Tax $1/26/2016(2,550)$

Rent Payment $6/30/20165,100$

Rent Payment $12/27/20165,100$

pay insurance & property Tax $1/26/2017(2,601)$

Rent Payment $6/30/20175,202$

Rent Payment $12/27/20175,202$

pay insurance & property Tax $1/26/2018(2,653)$

Rent Payment $6/30/20185,306$

Rent Payment $12/27/20185,306$

pay insurance & property Tax $1/26/2019(2,706)$

Rent Payment $6/30/20195,412$

Replace the well $7/25/2019(30,000)$

Rent Payment $12/27/20195,412$

pay insurance & property Tax $1/26/2020(2,760)$

Rent Payment $6/30/20205,520$

Rent Payment $12/27/20205,520$

pay insurance & property Tax $1/26/2021(2,815)$

Rent Payment $6/30/20215,631$

Put on a new roof $8/14/2021(10,000)$

Rent Payment $12/27/20215,631$

pay insurance & property Tax $1/26/2022(2,872)$

Rent Payment $6/30/20225,743$

Rent Payment $12/27/20225,743$

pay insurance & property Tax $1/26/2023(2,929)$

Rent Payment $6/30/20235,858$

Rent Payment $12/27/20235,858$

pay insurance & property Tax $1/26/2024(2,988)$

Rent Payment $6/30/20245,975$

Rent Payment $12/27/20245,975$

pay insurance & property Tax $1/26/2025(3,047)$

Rent Payment $6/30/20256,095$

Rent Payment $12/27/20256,095$

pay insurance & property Tax $1/26/2026(3,108)$

Rent Payment $6/30/20266,217$

Rent Payment $12/27/20266,217$

pay insurance & property Tax $1/26/2027(3,171)$

Rent Payment $6/30/20276,341$

Rent Payment $12/27/20276,341$

pay insurance & property Tax $1/26/2028(3,234)$

Rent Payment $6/30/20286,468$

Rent Payment $12/27/20286,468$

pay insurance & property Tax $1/26/2029(3,299)$

Rent Payment $6/30/20296,597$

Rent Payment $12/27/20296,597$

pay insurance & property Tax $1/26/2030(3,365)$

Rent Payment $6/30/20306,729$

Rent Payment $12/27/20306,729$

pay insurance & property Tax $1/26/2031(3,432)$

Rent Payment $6/30/20316,864$

Rent Payment $12/27/20316,864$

pay insurance & property Tax $1/26/2032(3,501)$

Rent Payment $6/30/20327,001$

Rent Payment $12/27/20327,001$

pay insurance & property Tax $1/26/2033(3,571)$

Rent Payment $6/30/20337,141$

Rent Payment $12/27/20337,141$

Sell the house $12/30/2033450,00059$