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 $1,039,260.00 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 5.00% 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 $842,924.00 invested today, and will generate $200,000.00 in the first year. The cash flows from the project will DECLINE by 5.00% 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.

What is the NPV of project B?

Answer 1

Based on the given data, pls find below steps, workings and answer:

NPV of Project A is $ 221893.47 and Project B is $ 9077.39

Computation of Net Present Value (NPV) based on the Discounted Cash flows; The Discounting factor is computed based on the formula: For year 0, the discounting factor is 1; For Year 1, it is computed as = Year 0 factor /(1+discounting factor%) ; Year 2 = Year 1 factor/(1+discounting factor %) and so on;

Next, the cashflows need to be multiplied with the respective years' discounting factor, to arrive at the discounting cash flows;

The total of all the discounted cash flows is equal to its respective Project NPV of the Cash Flows;