You are considering the purchase of an apartment complex that will generate a net cash flow of \$400,000 per year. You normally demand a 10 percent rate of return on such investments. Future cash flows are expected to grow with inflation at 4 percent per year. How much would you be willing to pay for the complex if it? a.

You are considering the purchase of an apartment complex that will generate a net cash flow of \$400,000 per year. You normally demand a 10 percent rate of return on such investments. Future cash flows are expected to grow with inflation at 4 percent per year. How much would you be willing to pay for the complex if it?

a. Will produce cash flows forever?

b. Will have to be torn down in 20 years? Assume that the site will be worth \$5 million at that time net of demolition costs. (The \$5 million includes 20 years’ inflation.) Now calculate the real discount rate corresponding to the 10 percent nominal rate. Redo the calculations for parts (a) and (b) using real cash flows. (Your answers should not change.)

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...

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Related Book For

Principles of Corporate Finance

7th edition

Authors: Richard A. Brealey, Stewart C. Myers

ISBN: 978-0072869460