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. .<table role="presentation" class="rvTable"><colgroup style="box-sizing: border-box;"><col style="box-sizing: border-box; width: 137px;"/><col style="box-sizing: border-box; width: 22px;"/><col style="box-sizing: border-box; width: 77px;"/><col style="box-sizing: border-box; width: 113px;"/><col style="box-sizing: border-box; width: 28px;"/><col style="box-sizing: border-box; width: 92px;"/></colgroup><tbody style="box-sizing: border-box;"><tr style="box-sizing: border-box;" class="firstRow"><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: bottom;">Project</td><td colspan="2" style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: bottom;" width="93">Cost Today</td><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: bottom;">Discount Rate (%)</td><td colspan="2" style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: bottom;" width="114">Expected SalePrice in Year 5</td></tr><tr style="box-sizing: border-box;"><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">Mountain Ridge</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"> </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">$<span class="eqLabel fNormal" id="var_0" widgetid="var_0" aria-label="3 comma 000 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">3,000,000 </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">15</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"> </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">$<span class="eqLabel fNormal" id="var_1" widgetid="var_1" aria-label="18 comma 000 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">18,000,000 </td></tr><tr style="box-sizing: border-box;"><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">Ocean Park Estates</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"> </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_2" widgetid="var_2" aria-label="15 comma 000 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">15,000,000 </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">15</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"> </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_3" widgetid="var_3" aria-label="75 comma 500 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">75,500,000 </td></tr><tr style="box-sizing: border-box;"><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">Lakeview</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"> </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_4" widgetid="var_4" aria-label="9 comma 000 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">9,000,000 </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">15</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"> </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_5" widgetid="var_5" aria-label="50 comma 000 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">50,000,000 </td></tr><tr style="box-sizing: border-box;"><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">Seabreeze</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"> </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_6" widgetid="var_6" aria-label="6 comma 000 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">6,000,000 </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">8</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"> </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_7" widgetid="var_7" aria-label="35 comma 500 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">35,500,000 </td></tr><tr style="box-sizing: border-box;"><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">Green Hills</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"> </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_8" widgetid="var_8" aria-label="3 comma 000 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">3,000,000 </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">8</td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"> </td><td style="box-sizing: content-box; border-width: initial; border-style: none; border-color: initial; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_9" widgetid="var_9" aria-label="10 comma 000 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">10,000,000 </td></tr><tr style="box-sizing: border-box;"><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">West Ranch</td><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"> </td><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_10" widgetid="var_10" aria-label="9 comma 000 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">9,000,000 </td><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;">8</td><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"> </td><td style="box-sizing: content-box; border-top: none; border-right: none; border-bottom-color: rgb(0, 0, 0); border-left: none; image-rendering: -webkit-optimize-contrast; padding: 1px; background-color: transparent; vertical-align: middle;"><span class="eqLabel fNormal" id="var_11" widgetid="var_11" aria-label="46 comma 500 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; color: rgb(0, 0, 0); line-height: 0 !important; background-color: rgba(0, 0, 0, 0) !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">46,500,000 </td></tr></tbody></table> KP has a total capital budget of <span class="eqLabel fNormal" id="xl_eqeditor_EqLabel_71" widgetid="xl_eqeditor_EqLabel_71" aria-label="$ 18 comma 000 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; line-height: 0 !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">$18,000,000 to invest in properties.a. What is the IRR of each investment?b. What is the NPV of each investment?c. Given its budget of <span class="eqLabel fNormal" id="xl_eqeditor_EqLabel_72" widgetid="xl_eqeditor_EqLabel_72" aria-label="$ 18 comma 000 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; line-height: 0 !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">$18,000,000, which properties should KP choose?d. Explain why the profitability index method could not be used if KP's budget were <span class="eqLabel fNormal" id="xl_eqeditor_EqLabel_73" widgetid="xl_eqeditor_EqLabel_73" aria-label="$ 12 comma 000 comma 000" style="box-sizing: border-box; display: inline-block; font-family: Arial; line-height: 0 !important;"><span class="eqDocument" aria-hidden="true" role="presentation" style="box-sizing: border-box; display: inline-block; white-space: pre; padding-top: 0px; padding-bottom: 0px; position: relative; border-spacing: 0px; line-height: 0 !important;">$12,000,000 instead. Which properties should KP choose in this case?

<img src="//img.wizedu.com/questions/53347c20-cd98-11ec-a918-d3795cec6998.jpg" width="951" height="1687" /> <img src="//img.wizedu.com/questions/56c34c20-cd98-11ec-9683-19f71da5b15d.jpg" width="670" height="1155" /> <img src="//img.wizedu.com/questions/5b7406e0-cd98-11ec-976b-b72cdbb654c3.jpg" width="783" height="868" />Note: MR= mountain range, OPE= ocean park estates, L= lakeview,S= seabreze, GH= green Hills, WR= West Ranch

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In: Finance

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

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

$

15

$

Ocean Park Estates

15

Lakeview

15

Seabreeze

8

Green Hills

8

West Ranch

8

KP has a total capital budget of 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 , which properties should KP choose?

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

Expert Solution

Note: MR= mountain range, OPE= ocean park estates, L= lakeview,

S= seabreze, GH= green Hills, WR= West Ranch

jeff jeffy answered 2 years ago

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