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Answer on Finance Question for DixitM

Question #33141
Rafael owned an apartment building that burned down. The empty lot is worth $70,000 and Rafael has received $200,000 from the insurance company. Rafael plans to build another apartment building that will cost $275,000. His real estate adviser estimates that the expected value of the finished building on the real estate market will be $385,000 next year. The discount/interest rate is 10%? What are the NPV and IRR of this decision?
Expert's answer
PV of a finished building PV=385000/1.1=350000. So, NPV of the project NPV=350000-275000=75000.
To calculate IRR we solve an equation 275000=385000/(1+r),r=(85000-275000)/275000=40%.

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Comments

Assignment Expert
05.12.2016 12:36

Dear Aswathy, please use panel for submitting new questions

aswathy
05.12.2016 09:29

Roxanne invested $560,000 in a new business 7 years ago. The business was expected to bring in $8,000 each month for the next 26 years (in excess of all costs). The annual cost of capital (or interest rate) for this type of business was 7% with monthly compounding. What is the value of the business today? (Enter just the number in dollars without the $ sign or a comma and round off decimals to the closest integer, i.e., rounding $30.49 down to $30 and rounding $30.50 up to $31.)

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