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You Expect Annual Cash Flows from a Certain Property as Follows

Question 7

Multiple Choice

You expect annual cash flows from a certain property as follows:  Year 1 $20,000 Year 2 $22,000 Year 3$30,000 Year 4$31,000 Year 5$40,000\begin{array}{|c|c|}\hline \text { Year 1 } & \$ 20,000 \\\hline \text { Year 2 } & \$ 22,000 \\\hline \text { Year } 3 & \$ 30,000 \\\hline \text { Year } 4 & \$ 31,000 \\\hline \text { Year } 5 & \$ 40,000 \\\hline\end{array} In addition, you expect that you can sell the property at the end of the 5th year for 10 times its expected cash flow that year. If the opportunity cost of capital is 10% per year, then what is the net present value NPV) of a deal in which the investor has to pay $350,000 for the property at the end of Year 0, one year prior to the first cash flow) ?


A) -$19297.
B) +$3,282.
C) +$38,610.
D) None of the above.

Correct Answer:

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