Fundamentals of Finance Essay Example | Topics and Well Written Essays - 1750 words

Fundamentals of Finance - Essay Example Photos: Interior view of one of the master bedrooms showing a spacious area within the room. The outside view of the property showing a cultivated front yard suited with garbage cans and showing spacious distance from one property block to the next. The arrangement of the apartments allows a personal parking lot to the front and a walk through pavement connecting from the main residential interstate roads. Weblink: www.rightmove.co.uk/property-for-sale/property-41518172.html# Purchasing Price: ?59,500 The annual cash flows expected from the investment target is ?850 per calendar month as the area has competitive rental market given that area is spacious and secluded from industrial zones, hence fore, investors in this area are driven by the market valuation of the properties as well as the location which raises the expected valuation of the property to be higher than the market price. The market price of the same property along the Greater Manchester area is set at ?650 with regards to the proximity of properties and roads, shopping malls, security of the area, and demand and supply of rental properties along the same area. However the expected rental amount from this particular property is ?850 as the property is new, all its features are functional and the seclusion from the industrial areas makes the property higher valued than its market competition counterparts. Therefore, for Mr. Priddin to invest in this property, his annual cash flows are calculated as Annual Cash Flows Expected Investment Target: ?850 Per Calendar Month (PCM) = (?850 x 12) = ?10,200 The rationale of providing rental service for ?850 per month is because; after investigating the rental prices for 2 bedroom flats and apartments around the Little Lever Bolton within the Greater Manchester area, it is found out those property rentals per calendar month range from ?150-700 with regards to conditions and luxury facilities. With regards to the presence of communal gardens and the easy access to ground floor apartments, the prices for these properties are kept higher than the market price at either the threshold of ?700 PCM or above at ?1000. With Mr. Priddin expecting a 6% return on investment, the future value of the property is calculated as Perpetuity = (Rental Price x Months in a year)/r Therefore, If Mr. Priddin is to purchase this property at ?59,500 his annual returns would be Perpetuity = (850*12 months)/r = 10,200/0.06 = ?170,000 Hence fore, the present value of the future cash flows of ?170,000 is higher than the current selling price of ?59,500 and is therefore a good investment for Mr. Priddin to invest in. A) If as a landlord Mr. Priddin would like to keep this property and rent it forever raising the rent at the rate of 4%, is it advisable for Mr. Priddin to purchase this property? Then Using P = Co*(1+g)/r-g his return on investment would be calculated with regards to the purchase price of the property C0 divided by the difference between the return on in vestment and expected less the rate of rent increase per year. P = C1/r-g P = 59500/6% - 4% P = ?2,975,000 With respect to the present value of the future cash flows of ?2,975,000 the purchase price of the property is lower and therefore the property is still worth buying. The difference between the present value of the property and the future cash f