To determine if the rental property is a good investment, we can calculate the Present Equivalent (PE) or the Net Present Value (NPV) of the expected income over the 14-year period and compare it to the initial investment.

Given:

• Initial annual income $I_1 = 1300$ USD
• Annual decrease in income $d = 35$ USD
• Expected life of the property $N = 14$ years
• Investment cost $C_0 = 7000$ USD
• Interest rate $i = 10\%$ per year

Approach:

1. Cash Flow Calculation: The income starts at $1300$ USD for the first year and decreases by $35$ USD each year, forming an arithmetic series. Thus, the income for year $n$ is: $I_n = 1300 - (n - 1) \cdot 35$ This gives:

   • $I_1 = 1300$
   • $I_2 = 1300 - 35 = 1265$
   • $I_3 = 1300 - 2 \cdot 35 = 1230$
   • ...

2. Present Value (PV) of Cash Flows: The present value of the income in each year needs to be discounted back to present time using the formula for the present value of a cash flow at year $n$: $PV_n = \frac{I_n}{(1 + i)^n}$ where $i = 0.10$.

3. Summing the Present Value of All Cash Flows: We calculate the present value for all 14 years, sum them up, and compare it to the initial investment cost.

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Here are 5 related questions you might find helpful:

1. How is the present value of cash flows calculated in financial analysis?
2. What does a negative NPV indicate about an investment?
3. How does the interest rate impact the present value of future cash flows?
4. What are the advantages of using NPV to evaluate investment decisions?
5. How does a declining income stream affect the overall investment value?

Tip: Always compare the NPV of an investment with the initial cost to assess its profitability.