RE 3010.010 Homework 1 Time Value of Money Exercise

Objective: To learn TVM calculations using a financial calculator and Excel

Due date: Wednesday, July 1, 2015 by 4:45 PM

Submit: Submit on Desire2Learn - Upload completed files into Dropbox folder

Solve the following questions using a financial calculator. Submit your answers in Excel. Show calculator inputs (i.e. N, PV, etc.) to get partial credit.

1. How much would you pay for the right to receive $12,000 at the end of 15 years if you can earn a 15% return on a real estate investment with similar risk?

2. What constant amount invested at the end of each year at a 10% annual interest rate will be worth $20,000 at the end of five years?

3. Your father will convey a property to you in 10 years. If the property is expected to be worth $500,000 when you receive it, what is the present value of the property? Your discount rate is 15%.

4. What is the NPV of $600 received for the next four years and $1,500 received at the end of the fifth year if your required return is 10%?

5. Assuming no income or holding costs during the period, if you purchased a vacant parcel of land five years ago for $1,350,000, how much would you have to sell it for to yield a 12% annual return on your investment?

Solve the following questions using TVM formulas in Excel. Show your work to receive full credit.

6. You own a building that a local business wants to rent for the next 10 years. The business owner has offered to pay $40,000 today or pay $6,400 at the end of each of next 10 years. If your required rate of return is 10%, which payment schedule should you accept?

7. How much would you pay to participate in a real estate project that pays nothing for the first 10 years and $2,500 for the following 10 years if you can earn 13% return on other investments of similar risk?

8. Calculate the IRR and NPV for the following cash flows. Assume a 15% discount rate

Year Project 1 Cash flow

Project 2 Cash flow

0 -$20,000 -$20,000 1 1,000 12,000 2 3,000 15,000 3 4,000 3,000 4 12,000 4,000 5 15,000 1,000

9. If your tenant pays you rent of $24,000 a year for 10 years, what is the present value of the series of payments discounted at 10% annually?

10. You are going to invest $300,000 in a real estate investment project that generates the following cash flows.

Year 1 2 3 4 5 Cash flow 100,000 100,000 100,000 100,000 100,000

Assuming an 11% discount rate, what is the NPV of this project? What is the IRR?