Genaro needs to capture a return of 40 percent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro should be willing to pay for the property?

Question

Genaro needs to capture a return of 40 percent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro should be willing to pay for the property?

Answer 1

To calculate the maximum amount Genaro should be willing to pay for the property, we need to determine the present value of the future cash flows generated by the property.

Step 1: Calculate the present value of the rental income:
PV (Present Value) = Rental income / (1 + r)ⁿ
Where r is the required rate of return and n is the number of years.
Assuming the required rate of return is 40% and there is only one year:
PV of rental income = $25,000 / (1 + 0.40)¹ = $25,000 / 1.40 = $17,857.14

Step 2: Calculate the present value of the selling price:
PV of selling price = Selling price / (1 + r)ⁿ
Since Genaro will sell the property after one year, the present value of the selling price is equal to the selling price itself.
PV of selling price = $150,000

Step 3: Add the present values of the rental income and the selling price:
Max purchase price = PV of rental income + PV of selling price
Max purchase price = $17,857.14 + $150,000 = $167,857.14

Therefore, the maximum amount that Genaro should be willing to pay for the property is $167,857.14.

Answer 2

To determine the maximum amount that Genaro should be willing to pay for the property, we need to calculate the present value of the expected cash flows using a required rate of return of 40 percent.

First, let's calculate the present value of the expected cash flows:

1. Present value of the selling price at the end of the year:

PV_selling_price = $150,000 / (1 + 0.40) = $150,000 / 1.40 = $107,142.86

2. Present value of the rental income:

PV_rental_income = $25,000 / (1 + 0.40) = $25,000 / 1.40 = $17,857.14

Now, we can determine the maximum amount Genaro should be willing to pay by adding the present values of the selling price and rental income:

Maximum amount = PV_selling_price + PV_rental_income
= $107,142.86 + $17,857.14
= $125,000.00

Therefore, the maximum amount that Genaro should be willing to pay for the property is $125,000.