Question

Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows: Windy Acres Yearly Aftertax Cash Inflow 10,000 15,000 30,000 45,000 50,000 Probability 0.1 0.2 0.4 0.2 Hillcrest Apartments Yearly Aftertax Cash Inflow 15,000 20,000 30,000 40,000 Probability 0.2 0.3 1 0.1 0.1 Mr. Backster is likely to hold the apartment complex of his choice for about 25 years and will use this period for decision- making purposes. Either apartment can be purchased for $200,000. 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).

Answer 1

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Ova 1x ENG - 03:08 = 17-03-202022 ... o X CL538 X fc CK CL CM CNCO CN CCA 515 516 517 518 windy acres 519 PROB (P) 520 521 522 0.1 VARIANCE=P*(CF-E(CF))^2 40000000 45000000 523 CASH FLOW (CF) P*CF 10000 1000 0.2 15000 3000 0.4 30000 12000 0.2 45000 9000 0.1 50000 5000 E(CF) = 30000 VARIANCE (V (CF) STANDARD DEVIATION= 45000000 40000000 170000000 13038.40 [SQRT(variance)] 524 525 526 527 528 hillcrest apartments 529 PROB (P) 530 531 532 533 534 535 536 537 CASH FLOW (CF) p*CF 0.2 15000 3000 0.3 20000 6000 0.4 30000 12000 0.1 40000 4000 E(CF) = 25000 VARIANCE (V (CF)) STANDARD DEVIATION= VARIANCE=P*(CF-E(CF))^2 20000000 7500000 10000000 22500000 60000000 7745.97 [SQRT(variance)] 538 APPLICABLE 2 A ... MEAN STDV assignment DEAR prob sd cov TIME SERIES corr REGRESSION range CAMERA INTERVAL, NORMAL TREND freq MATRIX HYPO ... + :

Ova 1x ENG - 03:08 = 17-03-2020 22 ... o X CL560 X fc CL CM CN CO CCA APPLICABLE DISCOUNT RATE expected CF standard deviation CK 537 538 539 540 541 windy crest 542 hillcrest apartment 543 544 545 546 547 548 coefficient of variation (CV) B/A 0.4346 0.3098 30000 25000 13038.40 7745.97 9% (CV IS IN SECOND RANGE] 5% [CV IS IN FIRST RANGE] (a) note RISK ADJUSTED NPV windy crest NPV = PV OF ALL EXPECTED CF - INVESTMENT NPV = 30000 X PVIFA @9%, 25 YEARS - 200000 NPV = 30000 X 9.82257960 - 200000 NPV = 94677.39 9.82257960 549 PVIFA @9%, 25 YEARS (1/r)*(1-(1/(1+r)^n)) 14.09394457 550 551 552 553 554 PVIFA @5%, 25 YEARS (1/r)*(1-(1/(1+r)^n)) hillcrest apartment NPV = 25000 X PVIFA @5%, 25 YEARS - 200000 NPV = 25000 X 14.09394457 - 200000 NPV = 152348.61 555 b-1 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 556 557 558 559 b-2 5607 ... MEAN STDV assignment DEAR prob sd COV TIME SERIES corr REGRESSION range CAMERA INTERVAL, NORMAL TREND freq MATRIX HYPO ... |