Question

Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental properly. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows Probability Windy Acres Yearly Aftertax Cash Inflow 20, ENN 25,000 40,000 55.000 60,000 0.2 Hillcrest Apartments Yearly Aftertax Cash Inflow 25,000 30,000 40,000 50,000 Probability 0.2 0.2 e.2 0.2 Mr. Backster is likely to hold the apartment complex of his choice for about 20 years and will use this period for decision-making purposes. Either apartment can be purchased for $220,000. Mr. Backster uses a risk-adjusted discount rate approach'when evaluating investments. His scale is related to the coefficient of variation for other types of investments, he also considers other measures) Discount Rate Coefficient of Variation @-0.35 0.35-0.40 0.40-0.50 Over 2.50 (cost of capital) not considered a. Compute the risk-adjusted net present value for Windy Acres and Hillcrest Apartments. (Round "PV Factor" to 3 decimal places. Enter the answers in thousands of dollars. Do not round intermediate calculations. Round the final answers to nearest whole dollar.) Net present value Windy Acres Hillcrest Apartments

Answer 1

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11 Ale $59 w @ v 1x ENG 01:14 21-03-2070 A 24 C0516 - fix X CK CL CM C N CO CP CC 515 516 517 518 windy acres 519 PROB (P) 520 VARIANCE=P*(CF-E(CF))^2 80000000 45000000 521 0.2 0 523 CASH FLOW (CF) PⓇCF 0.2 20000 4000 25000 5000 0.2 40000 8000 0.2 55000 11000 0.2 60000 12000 E(CF) = 40000 VARIANCE (V (CF)) STANDARD DEVIATION= 524 45000000 80000000 525 526 527 250000000 15811.39 (SQRT(variance)] 528 hillcrest apartments 529 PROB (P) 530 531 532 CASH FLOW (CF) P*CF 0.2 25000 5000 0.3 30000 9000 0.4 40000 16000 0.1 50000 5000 E(CF) = 35000 VARIANCE (V (CF)) STANDARD DEVIATION= VARIANCE=P*(CF-E(CF))^2 20000000 7500000 10000000 22500000 533 534 535 536 60000000 7745.97 (SQRT(variance)] 537 538 APPLICABLE TREND freq MATRIX ... MEAN STDV assignment DEAR prob sd cov TIME SERIES corr REGRESSION range CAMERA INTERVAL, NORMAL HYPO ... :

11 Ale $59 w @ v 1x ENG 01:15 21-03-2070 24 CN559 : fic * CK CL CM CN со СР сс- 537 538 539 APPLICABLE DISCOUNT RATE expected CF standard deviation 540 coefficient of variation (CV) B/A 0.3953 0.2213 541 windy crest 542 hillcrest apartment 40000 35000 15811.39 7745.97 8% [CV IS IN SECOND RANGE] 6% [CV IS IN FIRST RANGE] 543 note RISK ADJUSTED NPV windy crest NPV = PV OF ALL EXPECTED CF - INVESTMENT NPV = 40000 X PVIFA@8%, 20 YEARS - 220000 NPV = 40000 X 9.81814741 - 220000 NPV = 172725.90 9.81814741 PVIFA @8%, 20 YEARS (1/r)*(1-(1/(1+r)^n)) 548 549 550 551 11.46992122 552 PVIFA @6%, 20 YEARS (1/6)*(1-(1/(1+r)^n)) hillcrest apartment NPV = 35000 X PVIFA @6%, 20 YEARS - 220000 NPV = 35000 X 11.46992122 - 220000 NPV = 181447.24 553 554 555 556 557 558 559 560 b-1 b-2 if projects are mutually exclusive, he should go for : HILLCREST if projects are not mutually exclusive, he should go for both It has higher NPV both has positive NPV ... MEAN STDV assignment DEAR prob sd COV TIME SERIEScorr REGRESSION range CAMERA INTERVAL, NORMAL TREND freqMATRIX HYPO... +