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S. S. Sarkar (S.S.S.), a real estate investment company, is considering investing in a shopping center. The sale price is $5,000,000 and S.S.S. expects to have positive after-tax and after-mortgage payment cash flows from rents of $550,000 for the next three years. S.S.S. can obtain a mortgage with a downpayment of $3,000,000. At the end of the third year, S.S.S. anticipates selling the shopping center for a net after-tax gain on sale of $4,500,000. If S.S.S.'s required return is 30%, should S.S.S. go ahead and purchase the shopping center?

Respuesta :

Answer:

S.S.S. should not purchase the shopping center because its NPV is negative, i.e. -$1,952,890.30

Explanation:

Note: See the attached file to see how the net present value is calculated.

From the file, it can seen that the project will result in a negative NPV of $1,952,890.30. Therefore, S.S.S. should not purchase the Shopping center.

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