Question

You have the opportunity to purchase an office building for $350,000 now. You want to operate the office building indefinitely, and you have a tenant lined up that will generate $55,000 cash inflows per year indefinitely. Suppose the interest rate (r) is 15%. 1. Calculate this investment's NPV. By using the NPV rule, do you want to take this investment? 2. Calculate the investment's IRR. By using the IRR rule, do you want to take this investment? 3. Calculate the payback period. By using the payback rule, do you want to take this investment? Suppose the preset cutoff period is 5 years.

          You have the opportunity to purchase an office building for $350,000 now. You want to operate the office building indefinitely, and you have a tenant lined up that will generate $55,000 cash inflows per year indefinitely. Suppose the interest rate (r) is 15%.

1. Calculate this investment's NPV. By using the NPV rule, do you want to take this investment?
2. Calculate the investment's IRR. By using the IRR rule, do you want to take this investment?
3. Calculate the payback period. By using the payback rule, do you want to take this investment? Suppose the preset cutoff period is 5 years.

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Added by Domingo C.

Horngren’s Cost Accounting

Srikant M. Datar, Madhav V. Rajan 16th Edition

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Solved by Expert Supreeta N

09/05/2023

Step 1

NPV Calculation: The NPV (Net Present Value) of an investment is the present value of its cash inflows minus the present value of its cash outflows. In this case, the cash inflow is $55,000 per year indefinitely, which is a perpetuity. The present value of a Show more…

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You have the opportunity to purchase an office building for $350,000 now. You want to operate the office building indefinitely, and you have a tenant lined up that will generate $55,000 cash inflows per year indefinitely. Suppose the interest rate (r) is 15%. 1. Calculate this investment's NPV. By using the NPV rule, do you want to take this investment? 2. Calculate the investment's IRR. By using the IRR rule, do you want to take this investment? 3. Calculate the payback period. By using the payback rule, do you want to take this investment? Suppose the preset cutoff period is 5 years.

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Transcript

00:01 Hello students, here is a question.

00:02 You have the opportunity to purchase an office building for $50 ,000.

00:07 Now, you want to operate the office building identifying and you have a tenant lined up with the guarantee of $55 ,000 cash inflow per year.

00:20 Identify, suppose the interest rate is 15%.

00:24 Calculate the interest investment of npv by using an npv rule.

00:29 Do you want to take this investment? so, this is our question.

00:33 Let us solve this.

00:39 So, computation of npv.

00:40 Also, here in the question, we need to calculate the payback period and the present cutoff period for 5 years.

00:49 So, first we will calculate the npv.

00:57 So, npv is equal to pv of inflows minus pv of outflows.

01:03 Net present value is equal to present value of cash inflow minus present value of cash outflow.

01:13 So, the values are, so to calculate the pv of inflow, that is annual cash flow divided by required rate of return, that is 55 ,000 divided by 15%.

01:32 So, we get 366 ,666 .67 minus 350 ,000.

01:45 So, which gives us 16 ,666 .67 dollars as an npv.

01:55 So, since the npv is positive, as per the investment should be made.

02:00 Now, we will move on to the p sub question...

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