Question
An investor has projected three possible scenarios for a project as follows: Pessimistic NOI will be $300,000 the first year, and then decrease 2 percent
An investor has projected three possible scenarios for a project as follows:
PessimisticNOI will be $300,000 the first year, and then decrease 2 percent per year over a five-year holding period. The property will sell for $2.20 million after five years.
Most likelyNOI will be level at $300,000 per year for the next five years (level NOI) and the property will sell for $3.00 million.
OptimisticNOI will be $300,000 the first year and increase 3 percent per year over a five-year holding period. The property will then sell for $4.20 million.
The asking price for the property is $3.00 million. The investor thinks there is about a 30 percent probability for the pessimistic scenario, a 40 percent probability for the most likely scenario, and a 30 percent probability for the optimistic scenario.
Required:
a. Compute the IRR for each scenario. b. Compute the expected IRR. c. Compute the variance and standard deviation of the IRRs.
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