Question

Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy the properties today and sell them five years from today. The following table summarizes the initial cost and the expected sale price for each property, as well as the appropriate discount rate based on the risk of each venture.

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Project	Cost Today		Discount Rate (%)	Expected Sale Price in Year 5
Mountain Ridge		$3,000,000	15		$18,000,000
Ocean Park Estates		15,000,000	15		75,500,000
Lakeview		9,000,000	15		50,000,000
Seabreeze		6,000,000	8		35,500,000
Green Hills		3,000,000	8		10,000,000
West Ranch		9,000,000	8		46,500,000

KP has a total capital budget of $18,000,000 to invest in properties.

a. What is the IRR of each investment?

b. What is the NPV of each investment?

c. Given its budget of $18,000,000, which properties should KP choose?

d. Explain why the profitability index method could not be used if KP's budget were $12,000,000 instead. Which properties should KP choose in this case?

Answer 1

Note: MR= mountain range, OPE= ocean park estates, L= lakeview,

S= seabreze, GH= green Hills, WR= West Ranch