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			Hillcrest Apartments
Yearly Aftertax Cash Inflow	Probability		Yearly Aftertax Cash Inflow	Probability
40,000	0.2		45,000	0.4
45,000	0.2		50,000	0.2
60,000	0.2		60,000	0.1
75,000	0.2		70,000	0.3
80,000	0.2

Mr. Backster is likely to hold the apartment complex of his choice for about 30 years and will use this period for decision-making purposes. Either apartment can be purchased for $150,000. 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).

Coefficient of Variation	Discount Rate
0–0.35	6%
0.35–0.40	10	(cost of capital)
0.40–0.50	15
Over 0.50	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	$

b-1. Which investment should Mr. Backster accept if the two investments are mutually exclusive?

• Hillcrest

• Windy Acres

• Both

• None

b-2. Which investment should Mr. Backster accept If the investments are not mutually exclusive and no capital rationing is involved?

• Windy Acres

• Hillcrest Apartments

• Both

• None

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

518 0.2 0.2 0.2 STATS - Microsoft Excel (Product Activation Failed) File Home Insert Page Layout Formulas Data Review View Add-Ins - 2x % Cut Σ AutoSum : A Calibri -11AA = = = Dr Wrap Text General E Copy Fill Paste BI U D- DA Merge & Center - $ % , :.: Conditional Format Cell Format Painter Insert Delete Format Sort & Find & Formatting as Table Styles 2 Clear Filter Select Clipboard Font Alignment Number Styles Cells Editing CK537 fx CK CL CM CN со СР windy crest 519 PROB (P) CASH FLOW (CF) P*CF VARIANCE=P*(CF-E(CF))^2 520 40000 8000 80000000 521 45000 9000 45000000 522 60000 12000 523 75000 15000 45000000 524 80000 16000 80000000 525 E(CF) = 60000 526 VARIANCE (V (CF)) 250000000 527 STANDARD DEVIATION= 15811.3883 [SQRT(variance)] 528 hillcrest apartments PROB (P) CASH FLOW (CF) P*CF VARIANCE=P*(CF-E(CF))^2 530 0.4 45000 18000 40000000 531 50000 10000 5000000 0.1 60000 6000 2500000 533 0.3 70000 21000 67500000 E(CF) = 55000 535 VARIANCE (V (CF)) 115000000 536 STANDARD DEVIATION= 10723.8053 [SQRT(variance)] 537 538 APPLICABLE P V FV DIVIDEND EMV MEAN STDV assignment DEAR Sheet2 COV TIME SERIES corr REGRESSION range CAMERA TREND freg_MATRIX INTERVAL, NORMAL HYPOTHIC Rea ferences DOI 120% - O . B 9 . * ENG 07-11-2019 529 0.2 532 534 H

STATS - Microsoft Excel (Product Activation Failed) Add-Ins File Home Insert Page Layout Formulas Data Review View - 2x % Cut Dr Wrap Text Wrap Text Merge & Center - A A General $ % , Number :.: Insert Delete Format Conditional Format Formatting as Table Styles Cell Styles Calibri -11AA = = = BI U D- DA Font fx C K CL Σ AutoSum : A Autosum27 Fill Sort & 2 Clear Filter Editing Find & Select Alignment E Copy Paste Format Painter Clipboard CK539 CJ 538 Cells CM CN CO СР APPLICABLE DISCOUNT RATE 539 expected CF standard deviation coefficient of variation (CV) B/A 15811.3883 0.2635 10723.8053 0.1950 windy crest hillcrest apartment 60000 55000 6% [CV IS IN FIRST RANGE] 6% (CV IS IN FIRST RANGE] 540 541 542 543 544 545 546 547 548 549 (a) RISK ADJUSTED NPV windy crest NPV = PV OF ALL EXPECTED CF - INVESTMENT NPV = 60000 X PVIFA @6%, 30 YEARS - 150000 NPV = 60000 X 13.76483115 - 150000 NPV = 675889.87 note PVIFA @6%, 30 YEARS (1/r)*(1-(1/(1+r)^n)) 13.76483115 550 551 552 553 554 555 hillcrest apartment NPV = 55000 X PVIFA @6%, 30 YEARS - 150000 NPV = 55000 X 13.76483115 - 150000 NPV = 607065.71 556 b-1 b-2 if projects are mutually exclusive, he should go for : windy crest if projects are not mutually exclusive, he should go for both It has higher NPV both has positive NPV 557 CCO M EMV MEAN STDV assignment DEAR Sheet2 COV TIME SERIES corr REGRESSION range CAMERA TREND freg MATRIX O PV FV DIVIDEND ferences INTERVAL, NORMAL BO HYPOTHO 120% LI _ Rea 1 a e 9 $ 55 K W ODOB 9 * ENG 07-11-2019