Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy the properties today and
Question:
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 profitably index method could not be used if KP’s budget were $12,000,000 instead. Which properties should KP choose in this case?
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