Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You re considering purchasing an apartment for $ 2 0 0 , 0 0 0 . You believe that you can earn an initial rental

Youre considering purchasing an apartment for $200,000. You believe that you can earn an initial rental income of $12,000 per year on it and that the rental income will grow at 3% per year. You also believe that you can sell the apartment for $225,000 after 5 years. The IRR calculation is shown below: Which of the following statements about this analysis is/are NOT valid?Apartment Purchase and Sale - IRR Estimate Which of the following statements about this analysis is/are NOT valid?
A
If this 8.5% IRR exceeds the expected annualized return on other, similar apartments in this area, then this apartment may be a better investment option than the others.
B
You could have come up with a quick approximation for the IRR by observing that $12/ $200=6.0%, and $25/ $200=12.5%; 12.5%/5=2.5%, and 6.0%+ $2.5%=8.5%.
C
This 8.5% IRR means that if you invested $200,000 and earned 8.5% on it each year, compounded annually, then youd end up with the $239,000 total shown at the end of Year 5.
D
This 8.5% IRR means that if you invested $200,000 and earned 8.5% on it each year, compounded annually, then youd end up with the ~$289,000 in total cash flows shown over Years 15.
E
Statements B, C, and D are all invalid.
F
Statements B and C are invalid.
G
Statements C and D are invalid.
image text in transcribed

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Foundations In Personal Finance

Authors: Dave Ramsey

1st Edition

0981683967, 978-0981683966

More Books

Students also viewed these Finance questions