Question

6. An investor is analyzing two parcels of vacant land to determine which is a better investment to purchase and hold for future appreciation in value: The following are the analysis assumptions for the two parcels.

                                            Parcel A                Parcel B

Purchase price                 100,000                    150,000

Carrying cost per year     1,500                          2,200

Projected sale price         180,000                     300,000

Anticipated Holding period 5 years                    7 years

What is the projected IRR for each of the parcels?

7. Using this information from the previous question, what could the investor pay for each of the parcels to achieve a 12 percent yield?

Answer 1

Lets compute the IRR by Interpolation method,

For project A, lets compute the NPV of A at 11% and at 12% and interpolate

Initial cash outflow is $ 100,000 at year 0

Yearly outflow is 1500   being carrying cost of the land for years 1 to 4

5th year cash flow =   sale value inflow   - carrying cost outflow    

                            =180000-1500     =   $178,500

Constructing the above into a table and discounting them at 11 and 12 % we get 2 NPVS.

    Irr formula is

             

substituting we get

            IRR     =  

                                        = 11 + 0.28

                 IRR of project A                       =11.28%

similarly we will compute for B.

Initial cash outflow is $ 150,000 at year 0

Yearly outflow is 2200   being carrying cost of the land for years 1 to 6

7th year cash flow =   sale value inflow   - carrying cost outflow    

                            =300000-2200     =   $297,800

Constructing the above into a table and discounting them at 9 and 10 % we get 2 NPVS

IRR,

                       

                                 =   9 +   0.30

                            NPV of project B    =9.30%

The excel forumulas are

alternatively, IRR can be determined in excel thru excel function of IRR as shown below

the amount to be paid by the investors to achieve a 12 % year ?

This will be the Cash flows of years 1 to 5 for project A discounted at 12%              

                   Cash flows of years 1 to 7 for project B discounted at 12%              

         

the amount to be paid by investor for a 12% yield is $96,729.67 for A    and   $125,665 for B

excel formulas