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:

Takeover

The acquisition of one company by another, wherein the acquiring company gains control over the target company's operations and assets.

Incremental Cash Flows

The additional cash flow a company receives from undertaking a new project, considering only revenues and expenses directly related to the project.

Discount Rate

The interest rate used to determine the present value of future cash flows in discounted cash flow analysis.

Privately Owned

A business that is owned by private individuals or entities and not by the government or public investors.