Suppose you own a small company that is contemplating construction of a suburban office block. The cost...

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Finance

Suppose you own asmall company that is contemplating construction of a suburbanoffice block. The cost of buying the land and constructing thebuilding is $755,000. Your company has cash in the bank to financeconstruction. Your real estate adviser suggests that you rent outthe building for two years at $32,750 a year and predicts that atthe end of that time you will be able to sell the building for$862,000.
Thus there are now twofuture cash flows--a cash flow of C₁ = $32,750at the end of year 1 and a further cash flow ofC₂ = ($32,750 + 862,000) = $894,750 at the endof the second year.
a.Calculate the NPV of the office building venture at interest ratesof 7, 12, and 17%. (Negative amount should beindicated by a minus sign. Do not round intermediate calculations.Round your answers to 2 decimal places.)
Net Present Value at 7% ?
Net Present Value at 12%
?
Net Present Value at 17% ?
b. At what discount rate (approximately) wouldthe project have a zero NPV? Check your answer by calculating theNPV at your approximate rate; it should be close to zero.(Enter your answer as a percent rounded to thenearest whole number.)
Approximate discount rate ? %

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Transcribed Image Text

Suppose you own asmall company that is contemplating construction of a suburbanoffice block. The cost of buying the land and constructing thebuilding is $755,000. Your company has cash in the bank to financeconstruction. Your real estate adviser suggests that you rent outthe building for two years at $32,750 a year and predicts that atthe end of that time you will be able to sell the building for$862,000.Thus there are now twofuture cash flows--a cash flow of C1 = $32,750at the end of year 1 and a further cash flow ofC2 = ($32,750 + 862,000) = $894,750 at the endof the second year.a.Calculate the NPV of the office building venture at interest ratesof 7, 12, and 17%. (Negative amount should beindicated by a minus sign. Do not round intermediate calculations.Round your answers to 2 decimal places.)Net Present Value at 7%?Net Present Value at 12%?Net Present Value at 17%?b. At what discount rate (approximately) wouldthe project have a zero NPV? Check your answer by calculating theNPV at your approximate rate; it should be close to zero.(Enter your answer as a percent rounded to thenearest whole number.)Approximate discount rate? %

Net Present Value at 7%	?
Net Present Value at 12%	?
Net Present Value at 17%	?