Question

Suppose that a property owner plans on spending $15,000 per year over the next 5 years on maintenance and repairs. However, if she does not spend this amount, she will not be able to keep rents at market levels, vacancies will increase, and the resale value of the property in 5 years will be lower. Assume that she would lose about $7,000 a year in net income and would realize a loss of $85,000 in lower property value at the time of sale if maintenance is not maintained on the property. Determine the difference between the present value of the cost of maintaining the property and the loss to the owner if the property is not maintained assuming that the owner could earn a 7 percent return on any funds not invested in maintenance and repairs?

Answer 1

if the owner doesn't make the repairs, he/she will lose -$74,305 in current money

Step-by-step explanation:

the present value of the repairs is $15,000

the present value of the losses:

1. CF1 = -$7,000, PV = FV / (1 + r)ⁿ = -$7,000 / (1 + 7%) = -$6542
2. CF2 = -$7,000, PV = FV / (1 + r)ⁿ = -$7,000 / (1 + 7%)² = -$6,114
3. CF3 = -$7,000, PV = FV / (1 + r)ⁿ = -$7,000 / (1 + 7%)³ = -$5,714
4. CF4 = -$7,000, PV = FV / (1 + r)ⁿ = -$7,000 / (1 + 7%)⁴ = -$5,340
5. CF5 = -$92,000, PV = FV / (1 + r)ⁿ = -$92,000 / (1 + 7%)⁵ = -$65,595

NPV = $15,000 -$6542 -$6,114 -$5,714 -$5,340 -$65,595 = -$74,305