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September 19, 2014

Homework Help: Finance Management

Posted by Temeka Ramsey on Tuesday, July 10, 2007 at 2:33pm.

How do I solve this problem using net present value and internal rate of return methods?

Julie Kowalis, an investment analyst, wants to know if her investments during the past four years have earned at least a 12% return. Four years ago, she had the following investments:She purchased a small building for $50,000 and rented space in it. She received rental income of $8,000 for each of the four years and then sold the building this year for $55,000



Assuming there were no expenses related to being a landlord, which is almost never the case, the $8000 annual rental income was equivalent to earning 16% interest. There was also a capital gain of $5000 at the end of four years, which is equivalent to about 2.45% interest compounded annually. That is a net annual return of 18.45%, which is much better than 12%.

In real life, however, the tax, insurance and upkeep expense of owning the building would probably be in a 3%-5% range per year, with an additional 6-7% (1.2% annualized) cost of selling, making it a slightly better than 12% yield investment.

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