Suppose an Investor Is Interested in Purchasing the Following Income

question 20

Multiple Choice

Suppose an investor is interested in purchasing the following income producing property at a current market price of $490,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: Year 1 = $48,000, Year 2 = $49,440, Year 3 = $50,923, Year 4 = $52,451. Assuming that the required rate of return is 14% and the estimated proceeds from selling the property at the end of year four is $560,000, what is the NPV of the project?

• A) -$12,860.53
• B) $145,574.52
• C) $331,564.96
• D) $477,139.47

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Definitions:

Trade-offs

The idea of sacrificing one positive aspect or perk to obtain another that is considered to be more desirable.

Production Possibilities Frontier

A curve depicting the maximum attainable combinations of two products that may be produced with available resources and current technology.

Efficient

Achieving maximum productivity with minimum wasted effort or expense; in economics, an allocation of resources in which it is impossible to make any one individual better off without making someone else worse off.

Inefficient

Refers to a situation where resources are not used in the most effective way, leading to waste or suboptimal outcomes.