The purchase price of an income producing property today is

The purchase price of an income producing property today is $670,000. After analysis of the expected future cash flows, expected sales price, and expected yield, the investor determines that the future cash flows have a present value (PV) of $590,000. Taking into consideration the price of the property today, what is the net present value (NPV) of this investment opportunity, and should the investor take the deal? Show all work.

Solution

Net Present Value of investment opportunity is present value of future cash flows less cost of investment today. Present Value of expected future cash flows $       5,90,000 Less: Cost of investment today $     -6,70,000 Net Present Value $         -80,000 From the above calculation, it is determined that investment opportunity has negative net present value. It means, we are going to loose money if we take this investment opportunity. So, based on the above analysis, Investor should not take the deal.