An investor agreed to sell a warehouse 5 years from now to the tenant who currently rents the space. The tenant will continue to pay $20,000 rent at the end of each year including year five in which he will purchase the building for an additional $150,000. Assuming the investor's required rate of return is 10%, how much is this deal presently worth to the investor who was willing to sell?

Question

Quizplus · Accepted Answer

To calculate the Present Value (PV) of the deal, we need to discount each future cash flow back to the present using the investor's required rate of return of 10%.

PV of Rent Payments:
Year 1: $20,000 / (1+0.1)^1 = $18,181.82
Year 2: $20,000 / (1+0.1)^2 = $16,528.93
Year 3: $20,000 / (1+0.1)^3 = $15,025.39
Year 4: $20,000 / (1+0.1)^4 = $13,657.62
Year 5: $20,000 / (1+0.1)^5 = $12,414.20

PV of Purchase Price:
$150,000 / (1+0.1)^5 = $86,374.07

Total Present Value:
$18,181.82 + $16,528.93 + $15,025.39 + $13,657.62 + $12,414.20 + $86,374.07 = $168,953.93

Therefore, the deal is worth $168,953.93 to the investor who was willing to sell.

An Investor Agreed to Sell a Warehouse 5 Years from Now