suppose that annual income from a rental property is expected to start at $1,300 per year and...

Question:

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.

Year Annual Income
0 ($8,000)
1 $1,300
2 $1,250
3 $1,200
4 $1,150
5 $1,100
6 $1,050
7 $1,000
8 $950
9 $900
10 $850
11 $800
12 $750
13 $700
14 $650
15 $600
Description Value Calculation
Interest Rate 0.09
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
IRR 10%


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