suppose that annual income from a rental property is expected to start at $1,300 per year and decrease at a uniform amount of $50 each year after the first year for the 15 year expected life of the property. the investment cost is $8000 and i is 9% per year. is this a good investment? assume that the investment occurs at time zero (now) and that the annual income is first received at EOY one.
Net present value
Net present value is used to convert multiple future values into a singular combined present value. This can be used to assess the feasibility and profitability of a venture.
Answer and Explanation:
The investment provides a positive return, but it is very low. The net present value of the return is 3.61% over the whole 15 year period. The IRR is 10% but this competes with the 9% interest rate creating small margins for the investor. Overall, this is not a good investment based on the risk associated with a single property and the low returns. The $8,000 could outperform in a low-risk, low-yield security.
The following table shows calculations.
|Net Present Value||$288.55||NPV(0.09,Year 1 Income:Year 15 income) - $8,000|
|Percentage return in present value||3.61%||$288.55 / $8000|
Become a member and unlock all Study Answers
Try it risk-free for 30 daysTry it risk-free
Ask a question
Our experts can answer your tough homework and study questions.Ask a question Ask a question
Learn more about this topic:
from Accounting 102: Intro to Managerial AccountingChapter 8 / Lesson 4