Real estate Q

[pierovic18]

You are considering purchasing rental property that's priced at $3,000,000. After accounting for the likelihood of financing 75% of this purchase with a 10-year loan at 8%, you estimate the following net cash flows over the next five years: Furthermore, you estimate that once you sell the property in five years, you will get a net proceed of $600,000 after paying off the mortgage. If your required rate of return is 11% for this particular investment, should you go ahead and purchase it?
You are considering purchasing rental property that's priced at $3,000,000. After accounting for the likelihood of financing 75% of this purchase with a 10-year loan at 8%, you estimate the following net cash flows over the next five years: Furthermore, you estimate that once you sell the property in five years, you will get a net proceed of $600,000 after paying off the mortgage. If your required rate of return is 11% for this particular investment, should you go ahead and purchase it?

Year 1. 120000
year 2 135000
year 3 152000
Year 4 168000.
year 5 177000

(a) No, because the NPV is -$2,099,404.
(b) No, because the NPV is -$205,475.
(c) Yes, because the NPV is $900,596.
(d) Yes, because the NPV is $150,596.


correct answer is d. Your answer was incorrect!

Explanation:
NPV= -(25% of 3,000,0000) + 120000(discount)+ 135000(disocunted) ........+ 600000(dicsounted in 6th year)



Why do they use the 25% of 300000 and not the whole amount of the money

 

[exemplaria]

You're putting up $750,000 (25% x 3,000,000) of your own money. The bank is putting up the rest. From an investor standpoint, that is the only cash outflow.

 

[jamespucyk]

Yup, that's bang on for the initial cashflow and for the other ones the cashflows include interest and principal payments