A businessman isinterested in purchasing a residential apartment block as a long-term investment.

he has identified two identical apartment blocks in two different cities: City A and City B.

The discount rate for an asset with the same level of risk is 6%.

The following information is also relevant: City A City B

Expected annual growth in net operating income (NOI) Years 2-10: 5.00% 4.00%

Terminal growth rate (post-Year 10): 2.00% 2.00%

Rent income Year 1: 120000 100000

Maintenance expense Year 1 (does not repeat): 30000 30000

Purchase price: 1600000 1400000

Discount rate: 6.00% 6.00%

Hint 1:The terminal value of each apartment block (at the end of year 10) is calculated by using the formula of growing perpetuity

Hint 2: NOI= Rent - Maintenance expense

Q1 :Calculate the net present value (NPV), IRR and profitability index (PI) of each potential investment.

Q2: What is the best potential investment? Justify your answer.

A buisnessman is interested in purchasing a residential apartment block as a longterm investment. He has identied two identical apartment blocks in two different cities: City A and City B. The discount rate for an asset with the same level of risk is 6%. The following information is also relevant: I .I City A City B Expected annual growth in net operating income {NDI} Years 210: 5.00% 4.00% Terminal growth rate [postYear 10}: 2.00% 2.00% Rent income Year 1: 120000 100000 Maintenance expense Year 1 [does not repeat}: 30000 30000 Purchase price: 1600000 1400000 Discount rate: 6.00% 6.00% Hint 1:The terminal value of each appartment block [at the end of year 10} is calculated by using the formula of growing perpetuityr Hint 2:NDI= Rent Maintenance expense Q1:Calculate the net present value [NPV}, IRR and protability index {PI} of each potential investment. Q2:What is the best potential investment? Justify your