Question

You are looking to invest in a real-estate property to rent out that will cost $90,000. The property is expected to produce annual rent cash flows of $8,000 in Year 1, $8,400 in Year 2, and $8,800 in Year 3, at which point you will sell the property for $92,000.00, if your bank quotes you a mortgage rate of 6.5% per year what is the dollar return you can expect on your investment? Additionally, should you buy the property?

a. 7,854.33, no do not buy the property

b. 8,364.86, no do not buy the property

c. -7,864.33, yes buy the property

d. 8,364.86, yes buy the property

Could you also show me how you solved this please. Also, I am wondering how to solve this on a financial calculator if possible.

Answer 1

Calculate the net present value of the investment in the real-estate property and if it is positive you
you should buy the property
Present Value = Future value/ ((1+r)^t)
where r is the interest rate that is 6.5% and t is the time period in years.
Net present value (NPV) = initial investment + sum of present values of future cash flows.
cash flow in year 3 = 92000 + 8800
cash flow in year 3 = 100800
Year	0	1	2	3
cash flow	-90000	8000	8400	100800
Present value		7511.737	7405.938	83447.19
NPV	8364.86
Since the NPV (8364.86) is positive, you should buy the property.
d. 8,364.86, yes buy the property