A ten-unit apartment building has an annual cash flow of $60,000. The investor expects the end-of-year cash flow to be $60,000 times 1.025, with a growth rate of 2.5% per year. The investor wants to earn a 9% interest rate on this investment.

Compute the possible apartment building value today.

How to calculate in Excel:

1. Use the Present Value formula:

\[ \text{PV} = \frac{\text{Cash Flow}}{(1 + \text{Rate})^n} \]

2. In Excel, set up your formula using:

- Cash Flow: $60,000
- Growth Rate: 2.5%
- Interest Rate: 9%

3. Use the formula:

`=PV(9%, n, -60000*1.025, 0, 1)`

Replace "n" with the number of years you want to project.

Question

High School

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Answer :

lholamidemakinde lholamidemakinde · Answer 1 · 2023-09-04T08:00:45-04:00

The possible value of the apartment building today is approximately $14,555,060.54.

The cash flow in year one is projected to be $60,000 * 1.025 = $61,500. We can calculate the initial cash flow using the formula:

Initial Cash Flow = Year One Cash Flow / (Interest Rate - Growth Rate)

Initial Cash Flow = $61,500 / (0.09 - 0.025) = $61,500 / 0.065 = $946,153.85

The present value of a growing perpetuity formula is:

Present Value = Initial Cash Flow / (Interest Rate - Growth Rate)

Present Value = $946,153.85 / 0.065

= $14,555,060.54

Therefore, the possible value of the apartment building today is approximately $14,555,060.54.

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