Suppose that an income producing property is expected to yield cash flows for the owner of $10,000 in each of the next five years,with cash flows being received at the end of each
Period.If the opportunity cost of investment is 12% annually and the property can be sold for $100,000 at the end of the fifth year,determine the value of the property today.

Question

Quizplus · Accepted Answer

The present value of the cash flows and the sale price is calculated using the formula for the present value of an annuity and a lump sum. The present value of the $10,000 annual cash flows for 5 years at 12% is $36,046.92, and the present value of the $100,000 sale price at the end of year 5 is $56,743.53. Adding these gives a total present value of $92,790.45.

Suppose That an Income Producing Property Is Expected to Yield