Calculate the project’s ROI, NPV, and IRR.

As in the first option, start with the return on investment for the first five years of the property.

The calculation for ROI requires dividing the annual cash flow by the equity investment. The following chart breaks down the calculation:

Year Annual Cash Flow Equity Investment ROI 

1 $182,120 $1,500,000 12.1%

2 $298,015 $1,500,000 19.9%

3 $430,466 $1,500,000 28.7%

4 $540,842 $1,500,000 36.1%

5 $620,865 $1,500,000 41.4%

The table indicates that the ROI ranges from 12.1% to 41.4% during the five years of operation.

Next, look at the calculations of NPV and IRR for this project.

As stated in the explanation for option #1, in order to compute the NPV you must input the cash flows for years 1 through 5.

Remember to include the terminal sale price in the cash flow for year 5, which would be $6,208,650 ($620,865  10%). The terminal sale price is calculated by using the capitalization method of valuation. The other variable needed to calculate NPV is the cost of capital, which in this case equals 12%. When you compute NPV, you get a positive $50,546. Calculate the IRR;

your answer should be 12%.