Unformatted text preview: d cash flows and apply logical manipulations. To illustrate,
assume that Markum Real Estate is considering buying an office building. The building will be
vacant for two years while it is being renovated. Then, it will produce annual rents of $100,000 at
the beginning of each of the next three years. The building will be sold in five years for $700,000.
Markum desires to know the present value of the anticipated cash inflows, assuming 5% annual
As you can see below, the rental stream has a present value of $285,941 as of the beginning of Year
3. That value is discounted back to the beginning of Year 1 value ($259,357) by treating it as a lump
sum. The sales price is separately discounted to its present value of $548,471. The present value of
the rents and sales price are combined to produce the total present value for all cash inflows
($807,828). This type of cash flow manipulation is quite common in calculating present values for
many investment decisions. Download free ebooks at bookboon.com
27 Compound Interest and Present Value Analytics for Managerial Decision Making For the more inspired mind, you will at least find it interesting to note that an alternative way to
value the rental stream would be to subtract the value for a two year annuity from the value for a
five year annuity (4.54595 - 1.95238 = 2.59357; $100,000 X 2.59357 = $259,357). This result
occurs because it assumes a five-year annuity and backs out the amount relating to the first two
years, leaving only the last three years in the resulting present value factor. Like all things
mathematical, the more you study them, the more power you find buried within! Please click the advert Budget-Friendly. Knowledge-Rich.
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