A duplex is for sale for $700,000 at this time. It has 2 units that generate...
A duplex is for sale for $700,000 at this time. It has 2 units that generate a total of $25,000 in gross rent. The property taxes are $4,000, commercial property insurance is $2,000, flood insurance is $1,000, and annual maintenance is $2,000. You expect to sell it in one year at a price growth of 0%. What is the NPV with a WACC of 10%. Is the IRR greater or less than the WACC? Would you invest in this project and why?
Homework Answers
| gross rental revenue | 25000 | ||
| annual cost or expenses | 9000 | ||
| net annual revenue | 16000 | ||
| sale price of duplex | 700000 | ||
| cash flow in year 1 | 716000 | ||
| Year | |||
| 0 | -700000 | ||
| 1 | 716000 | ||
| IRR = Using IRR function in MS excel | IRR(C1702:C1703) | 2.29% | |
| IRR is lesser than WACC (2.29%<10%) | |||
| Year | cash flow | present value factor at 10% | present value of cash flow |
| 0 | -700000 | 1 | -700000 |
| 1 | 716000 | 0.909090909 | 650909.0909 |
| NPV = sum of present value of cash flow*present value factor | -49090.90909 | ||
| No I would not invest in this project as NPV is negative and IRR is less than WACC |
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A duplex is for sale for $700,000 at this time. It has 2 units
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