Subtract cost of remodel to arrive at NPV.
PVoa = PMT [(1 - (1 / (1 + i)^n)) / i]
= 820k[((1 - (1 / 1.15^5)) / 0.15]
= 820k[(1 - (1 / 2.01136)) / 0.15]
= 820k[(1 - 0.49718) / 0.15]
= 820k[0.50282 / 0.15]
= 820k[3.35216]
= 2,748,767.18
subtract remodel cost...= -651,232.82...answer is A.
For the second problem you need a financial calculator or spreadsheet (or use trial and error to guess until you solve for the rate that makes the NPV = 0).
IRR = 9.74817%...round to 9.75% Answer is A.
Here's a couple questions I've been stuck on. Just wanted to get some input on how you solved them so I can learn as well. Answers greatly appreciated:
Professional Properties is considering remodeling the office building it leases to Heartland Insurance.
The remodeling costs are estimated at $3.4 million. If the building is remodeled, Heartland Insurance
has agreed to pay an additional $820,000 a year in rent for the next 5 years. The discount rate is 15
percent. What is the benefit of the remodeling project to Professional Properties?
A. -$651,233
B. -$489,072
C. $5,214
D. $128,399
E. $311,417
A project has the following cash flows. What is the internal rate of return?
Years Cash Flow
0 -46,800
1 11,260
2 18,220
3 15,950
4 13,560
A. 9.75 percent
B. 10.28 percent
C. 10.60 percent
D. 10.67 percent
E. 11.23 percent
