Problem

Assume a property is priced at $5,000 and has the following income stream: YearCash Fl...

Assume a property is priced at $5,000 and has the following income stream:

Year

Cash Flow

1

$1,000

2

−2,000

3

3,000

4

3,000

Would an investor with a required rate of return of 15 percent be wise to invest at the current price?

a. No, because the project has a net present value of −$1,139.15.


b. No, because the project has a net present value of −$1,954.91.


c.  Yes, because the project has a net present value of $1,069.66.


d. Yes, because the project has a net present value of $1,954.91.


e.  An investor would be indifferent between purchasing and not purchasing the above property at the stated price.

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Solutions For Problems in Chapter 14