Question

Do calculations in excel and show work.

You are thinking about buying an investment property in San Jose for $150,000 today. You expect to earn $10,000 per year of net rental income (after costs, such as property tax, HOA and maintenance, etc.) on the property and you expect to sell it in 5 years for $200,000. If the annual discount rate is 8%, is this investment attractive to you?

(a) What is the net present value of this investment? Is this a good investment based on the net present value decision rule?

(b) What is the IRR for this investment? What decision would be reached based on the IRR decision rule?

Answer 1

	Present Value = Future value/ ((1+r)^t)
	where r is the discount rate that is 8% and t is the time period in years.
	Net present value (NPV) = initial investment + sum of present values of future cash flows.
	The internal rate of return (IRR) is the discount rate for which the NPV is zero.
	Year	0	1	2	3	4	5
	cash flow	-150000	10000	10000	10000	10000	200000
	present value		9259.259	8573.388	7938.322	7350.299	136116.6
	NPV	19237.91
a)	The NPV of the investment is 19237.91.
	Based on the NPV rule, this is a good investment because the NPV is greater than zero.
b)	Use the financial formulas function in excel to calculate the IRR.
	Year	0	1	2	3	4	5
	cash flow	-150000	10000	10000	10000	10000	200000
	IRR	10.95%
	Since the discount rate used for the project (8%) is less than the IRR (10.95%),
	based on the IRR rule this is a good investment.