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Your friend Steven is considering the purchase of a 3-unit rental property. He believes that it will be profitable over the next few years. The
Your friend Steven is considering the purchase of a 3-unit rental property. He believes that it will be profitable over the next few years. The property will cost him $250,000 today along with requiring $40,000 in closing costs on the loan and will generate the following rental income payments: $18,000 in Year 1, $19,000 in Year 2, $21,000 in Year 3, and $25,000 in Year 4. In Year 5, you will receive another $25,000 in rental income and he plans to sell the property at this point for $265,000. Assume the discount rate is 7%.
- 1A. What is the NPV of the project, and based on the NPV should he accept or reject the project? Why or Why not?
- 1B. What is the IRR of the project, and based on the IRR should he accept or reject the project? Why or Why not?
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