Question

A developer has 20 acres of real estate for a project. She has two projects to consider for the land. She can only select one project as both require all 20 acres. The developer is looking at a 10-year time frame for this investment. The expected cash flows from the projects are described below: PROJECT A: Apartments with retail space. The project will require $1,140,927.00 invested today, and an additional $800,000.00 in one year. The project will generate a cash flow of $250,000.00 in the second year. Cash flows will grow at 3.00% per year for the remainder of the 10-year project. The developer believes she can sell the property in year 10 for a cash flow of $3,000,000.00. PROJECT B: Upscale neighborhood The project will require $820,329.00 invested today, and will generate $200,000.00 in the first year. The cash flows from the project will DECLINE by 4.00% per year for the remainder of the 10-year project. The developer will not have any rights to the property at the end of the 10th year as the neighborhood will be fully developed. The developer wants a 15.00% return on his investments.

Answer 1

We need to find NPV of both option

Statement showing NPV of project A

Year	Cash flow	PVIF @ 15%	PV
0		-1140927.00	1.0000	-1140927.00
1		-800000.00	0.8696	-695652.17
2		250000.00	0.7561	189035.92
3	250000 x 1.03 =	257500.00	0.6575	169310.43
4	257500 x 1.03 =	265225.00	0.5718	151643.25
5	265225 x 1.03 =	273181.75	0.4972	135819.61
6	273181.75 x 1.03 =	281377.20	0.4323	121647.13
7	281377.20 x 1.03 =	289818.52	0.3759	108953.52
8	289818.52 x 1.03 =	298513.07	0.3269	97584.45
9	298513.07 x 1.03 =	307468.47	0.2843	87401.73
10	307468.47 x 1.03 =	316692.52	0.2472	78281.55
10 ( Sale of property)		3000000	0.2472	741554.12
NPV = sum of PV	44652.53

Thus NPV of project A = 44,652.53 $

Statement showing NPV of project B

Year	Cash flow	PVIF @ 15%	PV
0		-820329.00	1.0000	-820329.00
1		200000.00	0.8696	173913.04
2	200000 x 0.96 =	192000.00	0.7561	145179.58
3	192000 x 0.96 =	184320.00	0.6575	121193.39
4	184320 x 0.96 =	176947.20	0.5718	101170.14
5	176947.20 x 0.96 =	169869.31	0.4972	84455.07
6	169869.31 x 0.96 =	163074.54	0.4323	70501.62
7	163074.51 x 0.96 =	156551.56	0.3759	58853.53
8	156551.56 x 0.96 =	150289.50	0.3269	49129.90
9	150289.50 x 0.96 =	144277.92	0.2843	41012.79
10	144277.92 x 0.96 =	138506.80	0.2472	34236.76
NPV = sum of PV	59316.83

Thus NPV pf project B = 59,316.83 $

Thus project B should be undertaken as it has higher NPV than project A