What is the value of a building that is expected to generate fixed annual cash flows of 124,250 dollars every year for a certain amount of time if the first annual cash flow is expected in 3 years from today and the last annual cash flow is expected in 9 years from today and the appropriate discount rate is 9.72 percent?
To calculate the value of the building, we can use the concept of Present Value (PV) and the formula for calculating the Present Value of an ordinary annuity.
The formula for calculating the Present Value of an ordinary annuity is:
PV = C * [1 - (1+r)^(-n)] / r
Where:
PV = Present Value
C = Annual cash flow
r = Discount rate (expressed as a decimal)
n = Number of periods
In this case, the annual cash flow is $124,250, the discount rate is 9.72% or 0.0972 as a decimal, and the number of periods is 9-3 = 6 years.
Plugging in the values into the formula, we can calculate the present value:
PV = $124,250 * [1 - (1+0.0972)^(-6)] / 0.0972
Calculating this expression will give us the value of the building.