Answered: a) Identify the cash flows, their…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter5: The Time Value Of Money

Section: Chapter Questions

Problem 16P

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You are trying to evaluate the feasibility of purchasing a land. You plan to rent the plot of land to receive after-tax receipts of $2,500 per month. You are hoping to sell the land in the next ten years to receive after-tax proceeds of US$2.0 million to purchase a building containing at least four apartments. Assume the funds for purchasing the apartment will be drawn from your savings account which is currently earning 2% after taxes and that inflation rate is currently 5%.

a) Identify the cash flows, their timing and the required rate of return applicable to calculating the maximum value you should pay for the land.

b) Showing all calculations state if you should purchase the land for $1.6 million, justify your decision. What is the maximum price you should pay to acquire the single dwelling unit?

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