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Net Positive Value Apartment Building Value Calculation

You buy (t=0) an apartment building for $500,000. You expect to earn $40,000 a year in rent for the following 3 years (t=1-3). Then, at the end of year 3, you expect to sell the building for $550,000. The required rate of return for this sort of investment is 10%. The risk-free rate is 5%. Clearly show how you would calculate is the NPV of the investment by hand (not excel)?

Solution Preview

CF0 = initial investment = -$500,000
For t = 1 to 2,
CF1 = $40,000
CF2 = $40,000
At t = 3, CF3 = 550,000+40,000 ...

$2.19