Assume that you have a property that you have purchased for $500,000 and it generates $40,000 per year for Years 1-2, and $60,000 per year for Years 3-5 in annual net operating income and you expect to sell it for $600,000 at the end of 5 years. Assuming a 5% discount rate, calculate the NPV (Net Present Value) for this property.

To calculate the Net Present Value (NPV) of the property, we need to discount the future cash flows (including both the net operating income and the reversion value at sale) back to their present value at the given discount rate of 5%.

### Step 1: Identify the Cash Flows
- **Initial Investment:** $500,000 (outflow at Year 0)
- **Net Operating Income (NOI):**
  - Year 1: $40,000
  - Year 2: $40,000
  - Year 3: $60,000
  - Year 4: $60,000
  - Year 5: $60,000
- **Reversion Value (Sale Price at Year 5):** $600,000

### Step 2: Discount Each Cash Flow to Present Value
The formula for the present value of a future cash flow is:

\[
\text{PV} = \frac{\text{Future Cash Flow}}{(1 + r)^t}
\]

where:
- $ r $ is the discount rate (5% or 0.05)
- $ t $ is the time period in years

Let's calculate the present value of each cash flow:

1. **Year 1:**
   \[
   \text{PV}_1 = \frac{40,000}{(1 + 0.05)^1} = \frac{40,000}{1.05} = 38,095.24
   \]

2. **Year 2:**
   \[
   \text{PV}_2 = \frac{40,000}{(1 + 0.05)^2} = \frac{40,000}{1.1025} = 36,281.18
   \]

3. **Year 3:**
   \[
   \text{PV}_3 = \frac{60,000}{(1 + 0.05)^3} = \frac{60,000}{1.157625} = 51,817.04
   \]

4. **Year 4:**
   \[
   \text{PV}_4 = \frac{60,000}{(1 + 0.05)^4} = \frac{60,000}{1.21550625} = 49,349.56
   \]

5. **Year 5:**
   \[
   \text{PV}_5 = \frac{60,000}{(1 + 0.05)^5} = \frac{60,000}{1.27628156} = 46,909.11
   \]

6. **Reversion Value at Year 5:**
   \[
   \text{PV}_{\text{Reversion}} = \frac{600,000}{(1 + 0.05)^5} = \frac{600,000}{1.27628156} = 469,091.14
   \]

### Step 3: Sum the Present Values
Now, add up the present values of all cash flows and subtract the initial investment to get the NPV:

\[
\text{NPV} = (\text{PV}_1 + \text{PV}_2 + \text{PV}_3 + \text{PV}_4 + \text{PV}_5 + \text{PV}_{\text{Reversion}}) - \text{Initial Investment}
\]

Substitute the values:

\[
\text{NPV} = (38,095.24 + 36,281.18 + 51,817.04 + 49,349.56 + 46,909.11 + 469,091.14) - 500,000
\]

\[
\text{NPV} = 691,543.27 - 500,000 = 191,543.27
\]

### Conclusion
The NPV for this property, given the cash flows and a 5% discount rate, is **$191,543.27**.

Would you like any further details or have any questions about this calculation?

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Here are some related questions:

1. How would the NPV change if the discount rate was 7% instead of 5%?
2. What impact would a lower reversion value (e.g., $550,000) have on the NPV?
3. How does extending the holding period to 7 years with adjusted cash flows affect the NPV?
4. What if the property had higher net operating income in the first two years? How would that affect NPV?
5. How would inflation affect the calculation of the NPV in this scenario?

**Tip:** NPV is a critical measure in real estate investment analysis, as it accounts for the time value of money, ensuring that future cash flows are appropriately valued in today's terms.

Learn how to calculate Net Present Value (NPV) for a property investment using a 5% discount rate. Includes step-by-step calculation of present values for annual net operating income and reversion value at sale. Suitable for financial analysts and investors.

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