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# Net Present Value

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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:

a. 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.

b. She purchased a small refreshment stand near the city park for \$25,000. Annual income from the stand was \$5,000 for each of the four years. She sold the stand for \$20,000 this year.

c. She purchased an antique car for \$5,000 four years ago. She sold it this year to a collector for \$7,000.

Required:
1. Using the net present value method, determine whether or not each investment earned at least 12%.

2. Did the investments as a whole earn at least 12%? Explain.

#### Solution Preview

Since the question is asking for 12% return, use a discount rate =12% and see whether NPV is positive for this discount rate. If it is the investment earned 12%, if it is negative then the investment did not earn 12%.

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:

a. 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.

b. She purchased a small refreshment stand near the city park for \$25,000. Annual income from the stand was \$5,000 for each of the four years. She sold the ...

#### Solution Summary

Uses net present value to determine whether or not each of the three investment earned at least 12% and whether all the investments combined earned 12%.

\$2.19