Question

A real estate investment has the following expected cash flows:

                                  Year           Cash Flows

                                    1             $10,000

                                    2              25,000

                                    3              50,000

                                    4              40,000

The discount rate is 7 percent. What is the investment's present value?

Answer 1

Sol:

Cash Flows = Year 1 - $10,000, Year 2 - $25,000, Year 3 - $$50,000, Year 4 - $40,000

Discount rate = 7%

To determine present value of the project:

Computation of Present value of the project
Year	Cash Flow	PV factor @7%	Present value
1	$10,000	0.9346	$9,345.79
2	$25,000	0.8734	$21,835.97
3	$50,000	0.8163	$40,814.89
4	$40,000	0.7629	$30,515.81
Present Value	$102,512.46

Therefore present value of the project will be $102,512.46

Working

А B с D 1 Computation of Present value of the project 2 Year Cash Flow PV factor @7% Present value 31 10000 |=1/(1+7%)^1 =B3*C3 4 2 25000 =1/(1+7%)^2 =B4*C4 53 50000 |=1/(1+7%)^3 =B5*C5 64 40000 =1/(1+7%)^4 =B6*C6 7 Present Value =SUM(D3:06)

Net present value can also be determined as:

= 10000 / (1 + 7%)^1 + 25000 / (1 + 7%)^2 + 50000 / (1 + 7%)^3 + 40000 / (1 + 7%)^4

= 9345.79 + 21835.97 + 40814.89 + 30515.81 = $102,512.46