Question

Suppose a condo generates $12,000 in cash flows in the first year. If the cash flows grow at 4% per year, the interest rate is 9%, and the building will be sold at the end of 22 years with a value of $70,000, what is the present value of the condo's cash flow? Enter your response below (rounded to 2 decimal places). Number

Answer 1

1.
Present Value of the condo's cash flow = Present value of the cash flows for the first 21 years + Present Value of the selling price at year 22

PV = ($12,000 / (0.09 - 0.04)) * (1 - ((1 + 0.04) / (1 + 0.09))^21) + $70,000 / (1 + 0.09)^22

= $240,000 * 0.6270

= $150,472.8189 + $10,512.7197

= $160,985.54

Present Value of the condo's cash flow = $160,985.54

2.
EAR = (1 + r / n)^n - 1
= (1 + 0.05 / 12)^12 - 1
= 1.00416667^12 - 1
= 1.05116194 - 1
= 5.12%

EAR = 5.12%