# Calculating the net present value.

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Suppose that you are in the real estate business. You are considering the construction of an office building. The land would cost $50,000 and construction would cost another $300,000. Assume for the moment that a $400,000 payoff is guaranteed. The office building is not the only way to obtain $400,000 one year from now. How much would you have to invest in a government bond (interest rate @ 7%) in order to receive $400,000 at the end of the year?

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## SOLUTION This solution is **FREE** courtesy of BrainMass!

You would have to invest:

$400,000 X 1/1.07 = $400,000 X .935 = $373,832. Thus at an interest rate of 7%, the PV of $400,000 is $373,832.

The building is worth $373,832, but this does not mean that you are $373,832 better off. You committed $350,000, thus your net present value (NPV) is $23,832.

Â© BrainMass Inc. brainmass.com December 24, 2021, 4:43 pm ad1c9bdddf>https://brainmass.com/business/capital-budgeting/calculating-net-present-value-3984