In: Finance
Mr. Sam Golff desires to invest a portion of his assets in
rental property. He has narrowed his choices down to two apartment
complexes, Palmer Heights and Crenshaw Village. After conferring
with the present owners, Mr. Golff has developed the following
estimates of the cash flows for these properties.
Palmer Heights |
||||||
Yearly Aftertax Cash Inflow (in thousands) |
Probability | |||||
$ | 10 | .1 | ||||
15 | .2 | |||||
30 | .4 | |||||
45 | .2 | |||||
50 | .1 | |||||
Crenshaw Village |
||||||
Yearly Aftertax Cash Inflow (in thousands) |
Probability | |||||
$ | 15 | .2 | ||||
20 | .3 | |||||
30 | .4 | |||||
40 | .1 | |||||
a. Find the expected cash flow from each apartment
complex. (Enter your answers in thousands (e.g, $10,000
should be enter as "10").)
b. What is the coefficient of variation for each
apartment complex? (Do not round intermediate calculations.
Round your answers to 3 decimal places.)
c. Which apartment complex has more risk?
Palmer Heights | |
Crenshaw Village |
Answer a and b.
Palmer Heights:
Expected Cash Flow = 0.10 * $10 + 0.20 * $15 + 0.40 * $30 + 0.20
* $45 + 0.10 * $50
Expected Cash Flow = $30
Variance of Cash Flow = 0.10 * (10 - 30)^2 + 0.20 * (15 - 30)^2
+ 0.40 * (30 - 30)^2 + 0.20 * (45 - 30)^2 + 0.10 * (50 -
30)^2
Variance of Cash Flow = 170
Standard Deviation of Cash Flow = (170)^(1/2)
Standard Deviation of Cash Flow = $13.04
Coefficient of Variation = Standard Deviation of Cash Flow /
Expected Cash Flow
Coefficient of Variation = $13.04 / $30
Coefficient of Variation = 0.435
Crenshaw Village:
Expected Cash Flow = 0.20 * $15 + 0.30 * $20 + 0.40 * $30 + 0.10
* $40
Expected Cash Flow = $25
Variance of Cash Flow = 0.20 * (15 - 25)^2 + 0.30 * (20 - 25)^2
+ 0.40 * (30 - 25)^2 + 0.10 * (40 - 25)^2
Variance of Cash Flow = 60
Standard Deviation of Cash Flow = (60)^(1/2)
Standard Deviation of Cash Flow = $7.75
Coefficient of Variation = Standard Deviation of Cash Flow /
Expected Cash Flow
Coefficient of Variation = $7.75 / $25
Coefficient of Variation = 0.310
Answer c.
Coefficient of variation of Palmer Heights is higher than that of Crenshaw Village. So, Palmer Heights has more risk.