Dan Schmidt plans to invest in a rental property worth $240,000. He plans to hold the property for 4 years and expects to sell it for $280,000 at the end of the fourth year. He estimates that the average monthly net income from renting the property will be $2,250. His target return is 8%. Calculate the net present value of the investment.

Answer rating: 100% (QA)

To calculate the net present value NPV of the investment we need to calculate the present value of all cash inflows and outflows associated with the investment and then subtract the initial investment amount The formula for NPV is NPV PVInflows PVOutflows In this case the cash flows include the monthly net income from renting the property and the expected sale price at the end of the fourth year The discount rate is Dans target return of 8 Step 1 Calculate the present value of monthly rental income for 4 years Monthly rental income 2250 Annual rental income 2250 12 27000 The present value of an annuity formula is used for this calculation PV of annuity Annual rental income 1 1 rn r where r discount rate n number of periods r 8 n 4 years PV of annuity 27000 1 1 0084 008 PV of annuity 27000 1 13605 008 PV of annuity 27000 1 03605 008 PV of annuity 27000 06395 008 PV of annuity 27000 799375 PV of annuity 215847 Step 2 Calculate the present value of the expected sale price at the end of the fourth year Expected sale price 280000 The present value of a ... View the full answer