An advertisement offers a time share investment in a luxury

An advertisement offers a time share investment in a luxury apartment in the Algarve region of Portugal. Investors can purchase the use of the apartment for an eight-week period each year to rent out to tourists. The cost of the time share is $15,000 for five years and it is claimed that the net rental income will be $4,000 per year.

a) What is the payback period for the investment?

b) What is the net present value of the investment to an investor who would otherwise be able to earn 5% on their money?

c) In the small print of the advertisement it says a service charge of $1000 per annum is charged for the cleaning and general maintenance of the property. Work out how this will alter the net present value of the investment.

Please show all work. Thank you.

Solution

a. Cost = $15,000. Net rental income = $4,000 per year.

Payback = Cost/Net rental income = 15,000/4,000 = 3.75 years

b. Rate of interest = 5%. discount factor = 1+5% = 1.05. Net present value = sum of all present values. present value = amount of cash flow/discount factor^time

Thus the NPV = $2,317.91

c. If there is a service charge of $1,000 per annum then the net rental income will be $4,000 - $1,000 = $3,000. Using the present value formula stated in \"b\", the following calculations are made: