Suppose an Investor Is Interested in Purchasing the Following Income

question 11

Multiple Choice

Suppose an investor is interested in purchasing the following income producing property at a current market price of $450,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: Year 1 = $40,000, Year 2 = $45,000, Year 3 = $50,000, Year 4 = $55,000. Assuming that the required rate of return is 12% and the estimated proceeds from selling the property at the end of year four is $500,000, what is the NPV of the project?

• A) $8,829.96
• B) $9,889.56
• C) $428,113.65
• D) $459,889.56

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Definitions:

Futures Contract

A standardized legal agreement to buy or sell an asset at a predetermined price at a specified time in the future.

Portfolio's Beta

A measure of a portfolio's sensitivity to market movements, indicating how much the portfolio's value is expected to change with a change in the overall market.

S&P500 Value

Refers to the total market value of all stocks listed in the Standard & Poor's 500 Index, a commonly used representation of the U.S. equity market.

Futures Position

A commitment to buy or sell a specified amount of a commodity or financial instrument at a predetermined price at a specified time in the future.