1 Problem 3: [22 Points] Imagine a type of real estate property that is popular among small short-term investors. The investment plan is for 4 years. The experience indicates that the property provides the following reliable cash flows, and the price at the end of the period can be accurately calculated using a 10% cap rate. Year 2 3 4 CF 101,000 102,000 103,000 104,000 An investor can purchase the brand new property for 1,100,000. a) Write the exact formula for the calculation of IRR in this case. Calculate the going-in IRR in percentage for this property. Calculate it as a percentage and at 2 decimal points. [4] Note: IRR is the rate of the return or discount rate that makes NPV = 0 or Price =PV. Imagine three potential small investors: A, B, and C, who are interested in this property. Person A has an excellent credit rating and can easily borrow from banks at 5%. Person B has a lower credit rating and can borrow at 10%. Banks consider Person C as risky and only ready to lend him at 15%, Recall that these rates show the opportunity cost of investment for the investor b) Calculate the PV and NPV for A, B, and C7 [6] c) Which investor should or should not take on this investment? Why? [3] d) What is the maximum price that each investor is ready to pay to purchase this property? [3] e) Given that value IRR in part (a), explain and justify your answer in part (e) for each investor? [3] 1) Imagine that the market condition changes, and the cash flows and selling price become uncertain. Experts estimate that the risk premium of this type of property is 5% for all investors. Given the new information, which investor should or should not invest in this type of property? Explain why. [3]