Reference no: EM131550762

Suppose you own a small company that is contemplating construction of a suburban office block. The cost of buying the land and constructing the building is $780,000. Your company has cash in the bank to finance construction. Your real estate adviser suggests that you rent out the building for two years at $34,000 a year and predicts that at the end of that time you will be able to sell the building for $872,000.

Thus there are now two future cash flows--a cash flow of C₁ = $34,000 at the end of year 1 and a further cash flow of C₂ = ($34,000 + 872,000) = $906,000 at the end of the second year.

a. Calculate the NPV of the office building venture at interest rates of 5%, 10%, and 15%.

b. At what discount rate (approximately) would the project have a zero NPV? Check your answer by calculating the NPV at your approximate rate; it should be close to zero.