Reference no: EM133056368
1. Gloria wants to be a real estate investor. She has found a property she thinks might be a good deal. She has done some research about the property that has led her to the following forecast of the money she will be able to put in her pocket at the end of each of the next five years (with disposition at the end of year 5) as a result of owing this property:
Year 1: $22,350 Year 2: $21,785 Year 3: $23,650 Year 4: $23,830 Year 5 $77,650
If Gloria decides that she will only buy this property if she can earn an annual return of 11 percent, how much equity should she be willing to invest in the property today?
=22350/1.11+21785/1.11^2+23650/1.11^3+22830/1.11^4+77650/1.11^5
=$116,888.06
2. If the property in the previous question requires Gloria to put $115,000 of equity into the deal, should she invest in this property? Why or why not?
She should invest because the equity invested ($115,000) is lower than the value ($116,888) of the future cash flows.
3. If the property in the previous question requires Gloria to put $115,000 of equity into the deal, what is the NPV of this deal?
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