Question
You and your business partner identify an apartment building which you can purchase for $6 million today. According to your calculations, your annual profit (after
You and your business partner identify an apartment building which you can purchase for $6 million today.
According to your calculations, your annual profit (after all expenses) will be $600,000 received at the end of each of the next four years (ex: your first $600,000 payment will be received at the end of Year 1).
Finally, having established a track record, you plan on selling the buildings for $10.6 million at the end of the fourth year.
Q1(a). Using a table, lay out the stream of cash flows from this project as shown in class. Clearly indicate the period, the cash inflow / outflow during each period, and the source (or use) of the cash flow.
Hint: Your table should have at minimum five rows and five columns to be complete.
Q1(b). Assuming your discount rate is 6.5%, what is the NPV of this project?
Show your work by setting up the complete NPV formula, plugging your numbers into the formula, and showing the solution. Do not use Excels NPV functionwell practice that later.
Q1(c). Would this qualify as an acceptable property to invest in? Why or why not?
Explain your reasoning by discussing the part of the NPV Rule for Making Investment Decisions that's relevant to this situation and how it informs your decision.
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