Use the following information to answer questions 9-11: Rather then paying rent, Jeff and Sharon want to purchase, with cash, a $95,000 town home for their son Brett to live in while attending college. They expect the home to increase in value at a rate of 5% annually. The opportunity cost for the cash purchase is 7% (discount rate). They believe Brett can find roommates to pay rent toward the purchase that will produce the following net after-tax cash flows:

Year 1 $300

Year 2 $300

Year 3 $400

Year 4 $500

9. What will the value of the home be if sold at the end of the fourth year?

a) $99,750

b) $115,473

c) $124,525

d) $132,152

10. What is the NPV of the investment at the end of the fourth year?

a) -$5,656

b) -$3,962

c) $2,967

d) $3,894

11. Is this a good investment for Jeff and Sharon from a purely financial standpoint?

a) Yes, because the NPV implies that the rate of return on future cash flows is greater then the opportunity cost used to discount future cash flows

b) No, because the NPV implies that the rate of return on future cash flows is less then the opportunity cost used to discount future cash flows