Category: Business and Money > Accounting
Asked by: fatima1102-ga
List Price: $2.00
10 Sep 2005 23:32 PDT
Expires: 10 Oct 2005 23:32 PDT
Question ID: 566667
You are contemplating the purchase of an office building. Next year net rental income will be $400,000, which will grow at 4% per year. You believe that in 10 years the office building could be sold for $7.4 million. The appropriate discount rate for investments of this type is 12%. What is the most you should be willing to pay for the office building today?
Answered By: omnivorous-ga on 11 Sep 2005 10:16 PDT
Fatima1102 ? This is a straightforward net-present value problem, discounting cash flows for the cost of money each year: Investopedia.com ?Net Present Value -- NPV? (undated) http://www.investopedia.com/terms/n/npv.asp It?s common in these computations to set up each year?s NPV factor, then multiply cash flows times them. There?s an assumption here that all cash flows are coming at year-end, done to simplify the calculations (though they work with a half-year assumption and slightly different numbers): Year 1: 1/1.12 = 0.8929 Year 2: 1/(1.12)^2 = 0.7972 Year 3: 1/(1.12)^3 = 0.7118 . . . Year 10: 1/(1.12)^10 = 0.3220 You can now discount everything ? from the annual rents to your final sale price ? back to an NPV by multiplying it. I?ve set it all up in a spreadsheet here: http://www.mooneyevents.com/rental.xls Your total NPV is $4,999,607 ? so you?d pay any amount up to that level. Best regards, Omnivorous-GA
|fatima1102-ga rated this answer:|
|There are no comments at this time.|
If you feel that you have found inappropriate content, please let us know by emailing us at email@example.com with the question ID listed above. Thank you.
|Search Google Answers for|