Genaro needs to capture a return of 40 percent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro should be willing to pay for the property?

Fin/571 week 5 quiz (2015) 9/9 right solutions

To calculate the utmost quantity Genaro must be keen to pay for the property we have to account for each anticipated capital positive factors in addition to rental revenue. To start with, let’s assume he needs a return of 40% after one yr and that promoting worth of the property at the moment is predicted to be $150,000. This implies capital acquire would equate to 33% ($50,000/$150,000), whereas remaining 7% would come from rental revenue.

Given this data then utilizing discounted money movement (DCF) evaluation we will decide how a lot this anticipated return interprets into when it comes to present-day worth i.e. how a lot he ought to pay for the property in the present day if he needs to yield an annualized return of 40%. Assuming a reduction fee of 10%, then our DCF calculation would recommend that Genaro mustn’t pay greater than $71,142 ($50,000 + 0.07 x 1/1.10^1 x 25,000) which represents an intrinsic worth barely increased than anticipated promoting worth after one yr in order that he can profit from capital positive factors in addition to revenue derived from leases throughout his holding interval.