Given the following expected cash flow stream, determine the NPV of the proposed investment in an income producing property and determine whether or not the investment should be pursued. Investment Horizon: 5 years; Expected Yearly Cash Flow in each of the next five years: $127,628. Expected Sale Price at end of 5 years: $1,595,350; Opportunity Cost of Investment 6%; Current Market Price of Property: $1,750,000
A) NPV is -$20,246; Decision is to invest
B) NPV is -$20,246; Decision is not to invest
C) NPV is $249,967; Decision is to invest
D) NPV is $249,967; Decision is to not invest

Question

Quizplus · Accepted Answer

To calculate the NPV, we need to discount each cash flow using the opportunity cost of investment, which is 6%. Using a financial calculator or Excel, we can find the NPV to be -$20,246. This means the investment is not worth pursuing because the current market price of the property is higher than the present value of the expected cash flows and the sale price at the end of 5 years. Therefore, we choose option B as the answer.

Given the Following Expected Cash Flow Stream, Determine the NPV