A property investor buys a block of flats for £900,000 by making a down payment of £150,000 and taking an interest-only loan for the remaining £750,000 (i.e. she pays interest on the loan and will repay the capital at the end). The interest rate on the loan is 7% payable monthly, so the investor has to pay £4,375 at the end of each month. However, she receives £5500 at the end of each month in rent. In addition, the investor has to pay £8,000 in taxes at the end of the 6th and the 18th month. Two years after the initial purchase, the investor sells the block of flats for £930,000, out of which she uses £750,000 to repay her loan. 

1. Write down the formula for the net present value of this investment at the time of purchase of the block. The formula should be in terms of the interest rate i only, so it should not contain symbols like a. 

2. Compute the net present value for i = 0.1 and i 0.2, and use linear interpolation to approximate the internal rate of return for this investment.

Answer rating: 100% (QA)

Net present value NPV Present value of cash inflow PVCI Pres... View the full answer