Binrui is thinking of purchasing a small real estate project

Binrui is thinking of purchasing a small real estate project. The listing price (asking price) is $300,000. Binrui’s best estimate of the after tax cash flows is $30,000 in each year 1-5 and $36,000 in each year 6-10. In addition, he plans to sell the property at the end of 10 years for $264,000 after tax. If Binrui requires a 16 rate of return on his real estate investments, what is this project worth (present value) to him in today’s dollars?

Solution

Year

Cash flow

Present value factor@16%

Discounted Cash flow

1

30000

0.8621

25863

2

30000

0.7432

22296

3

30000

0.6407

19221

4

30000

0.5523

16569

5

30000

0.4761

14283

6

36000

0.4104

14774

7

36000

0.3538

12737

8

36000

0.3050

10980

9

36000

0.2630

9468

10

36000

0.2267

8161

10

264000 (sale)

0.2267

59849

214201

Worth of the project (present value) =214201

Year	Cash flow	Present value factor@16%	Discounted Cash flow
1	30000	0.8621	25863
2	30000	0.7432	22296
3	30000	0.6407	19221
4	30000	0.5523	16569
5	30000	0.4761	14283
6	36000	0.4104	14774
7	36000	0.3538	12737
8	36000	0.3050	10980
9	36000	0.2630	9468
10	36000	0.2267	8161
10	264000 (sale)	0.2267	59849
			214201