Question

In: Finance

You would like to develop an office building. Your analysts forecast that it will cost you $1,000,000 immediately (time 0)

11. You would like to develop an office building. Your analysts forecast that it will cost you $1,000,000 immediately (time 0), and it will cost you $500,000 in one year (time 1). They forecast you can sell the building for $2,400,000 in two years (time 2). If your discount rate is i= 25%, what is the net present value of this investment? (Answer is NOT 532,000, I think its 136,000)

12. What is the IRR of the project in question 11? (if you are using an ordinary calculator, it is a quadratic equation; if you are using a financial calculator, use the CF method). (Answer is NOT 54.67, I think its 31.92%)

Solutions

Expert Solution

11.Net present value can be solved using a financial calculator. The steps to solve on the financial calculator:

  • Press the CF button.
  • CF0= -$1,000,000. Indicate the initial cash flow by a negative sign since it is a cash outflow.  
  • Cash flow for each year should be entered.
  • Press Enter and down arrow after inputting each cash flow.
  • After entering the last cash flow cash flow, press the NPV button and enter the discount rate of 25%.
  • Press enter after that. Press the down arrow and CPT buttons to get the net present value.  

Net present value at 25% discount rate is $136,000.

12.Internal rate of return can be calculated using a financial calculator by inputting the below:

  • Press the CF button.
  • CF0= -$1,000,000. The initial cash flow is indicated by a negative sign since it is a cash outflow.  
  • Cash flow for each of the fifteen years should be entered.
  • Press Enter and down arrow after inputting each cash flow.
  • After entering the last cash flow cash flow, press the IRR and CPT button to get the IRR of the project.

The IRR of the project is 31.92%.


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