Question

In: Finance

4.You have two office-block proposals. You initially intended to invest $300,000 in the building and then...

4.You have two office-block proposals. You initially intended to invest $300,000 in the building and then sell it at the end of the year for $400,000. Under the revised proposal, you planned to rent out the offices for 3 years at a fixed annual rent of $15,000 and then sell the building for $500,000.

a). Calculate the IRR for the initial proposal;

b). Calculate the IRR for the revised proposal;

c). Which proposal should be chosen based on the IRRs of the proposals?

d). Calculate the crossover rate of initial and revised proposals;

e). Suppose that you use NPV rule to rank these two proposals. Which proposal should be chosen if the appropriate discount rate is 10%?

f). Explain why you have same (different) selection(s) in question c) and d).

Expert Solution

1. IRR will be = 33.33%

2. Revised IRR will be = 23.106%

3. Select intial project because of highest IRR

4. Cross over rate will be = 18.04%

5. If rate of return is 10% second project is selected due to highest NPV.

jeff jeffy answered 2 years ago

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