You can buy property today for $2.1 million and sell it in 6 years for $3.1 million. A. If the interest rate is 11%, what is the present value of the sales price? B. What is the present value of the future cash flows, if you also could earn $110,000 per year rent on the property?

Present value of sales price =  465,395.16

Present Value of future cash flow=  465,359.16  

Explanation:

The present value of a sum expected in the future is the worth today given an opportunity cost interest rate. In another words ,it is amount receivable today that would make the investor to be indifferent between the amount receivable today and the future sum.

The present value of a lump sum can be worked out as follows:

PV = FV × (1+r)^(-n)

Present Value of sales price= 3.1 × 1.11^(-6) =1.65739

Present Value=165,738.65

Present Value of an annuity of 110,000 for 6 years:

PV = A × 1- ( (1+r)^(-n))/r

PV = 110,000× (1-1.11^(-6))/0.11= 465,359.16  

PV =  465,359.16  

answer; functional fixedness;