Question

In: Finance

Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy the properties today...

Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy the properties today and sell them five years from today. The following table summarizes the initial cost and the expected sale price for each property, as well as the appropriate discount rate based on the risk of each venture.

Project

Cost Today

Discount Rate​(%)

Expected Sale

Price in Year 5      

Mountain Ridge

3,000,000

  

15

18,000,000.            

  

Ocean Park Estates

15,000,000  

15

75,500,000  

Lakeview

9,000,000  

15

50,000,000  

Seabreeze

6,000,000  

8

35,500,000  

Green Hills

3,000,000  

8

10,000,000  

West Ranch

9,000,000  

8

46,500,000  

KP has a total capital budget of $18,000,000 to invest in properties.

a. What is the IRR of each investment?

b. What is the NPV of each investment?

c. Given its budget of $18,000,000, which properties should KP choose?

d. Explain why the profitability index method could not be used if KP's budget were 12,000,000 instead. Which properties should KP choose in this case?

Solutions

Expert Solution

The formulas used are as follows

The Values are as follows

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