The annual income from an apartment house is $20,000
The annual income from an apartment house is $20,000. The annual expense is estimated to be $2,000. If the apartment house could be sold for $100,000 at the end of 10 years, how much could you afford to pay for it now at an interest rate of 10%. You should draw a CFD and show your analysis.
Homework Answers
| 4) | We will afford to pay equal to the present value of future cash flow | ||
| a | annual cash net inflow | $ 18,000 | |
| b | PV annuity factor for 10 years and 10 % | 6.14457 | |
| c | PV of Annual Cash Inflow (a*b) | $ 1,10,602 | |
| d | Resale Value at end of year10 | $ 1,00,000 | |
| e | PV factor of year 10 | 0.38554 | |
| f | PV Of resale value (d*e) | $ 38,554 | |
| g | Present Value (c+f) | $ 1,49,156.54 | |
| Alternatively can be calculated as follows | ||||
| Year | Cash Flow | PV Factor | PV of CF | |
| 1 | $ 18,000 | 0.909091 | $ 16,363.64 | |
| 2 | $ 18,000 | 0.826446 | $ 14,876.03 | |
| 3 | $ 18,000 | 0.751315 | $ 13,523.67 | |
| 4 | $ 18,000 | 0.683013 | $ 12,294.24 | |
| 5 | $ 18,000 | 0.620921 | $ 11,176.58 | |
| 6 | $ 18,000 | 0.564474 | $ 10,160.53 | |
| 7 | $ 18,000 | 0.513158 | $ 9,236.85 | |
| 8 | $ 18,000 | 0.466507 | $ 8,397.13 | |
| 9 | $ 18,000 | 0.424098 | $ 7,633.76 | |
| 10 | $ 1,18,000 | 0.385543 | $ 45,494.11 | |
| Present value | $ 1,49,156.54 | |||
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