Question

Your property is priced with an ex-ante risk premium of 6% over the ten-year treasury trading at 3%. The asset is paying $10 NNN rent for 30 years. Assume no change in pricing yields, no capital expenditures, no purchase or sale fees, and a sale in year five. The unlevered IRR is 8%. What is the NPV? A. <$0 B. =$0 C. >$0 D. Insufficient information

Answer 1

Answer: Option-(D): Insufficient information NPV expands as Net Present Value which is nothing but the difference between present value of future cash flows and initial investment in year-0 required to carryout the project. Positive NPV implies that present value of future cash flows is higher than the initial investment in year-0. So, the project shall be accepted because cash outflow associated with the project is recovered before expiry of life of the project itself even after considering time value of money. Negative NPV implies that present value of future cash flows is lower than the initial investment in year-0. So, the project shall be rejected because cash outflows associated with the project are not recovered before expiry of life of the project, considering time value of money. To calculate NPV, data related to initial investment, future cash flows and discount rate in terms of cost of capital of the project are required. In the given scenario, data related to future cash flows ($10 NNN rent for 30 years) is available, data related to cost of capital (unlevered IRR 896) is available; data related to initial investment is not available. So, insufficient information option is chosen