Henson Properties plans to buy a warehouse at auction today for conversion to luxury apartments. Currently the warehouse is used for storage, producing an income of 20,000 per year for the owner. If the property is acquired by Henson this lease will be terminated immediately. Henson has already paid 5,000 for a review of the property and is confident that it can be acquired for 750,000. The builder will require a payment of 100,000 immediately followed by 200,000 after one year and 50,000 at the end of the second year.

Each apartment will be sold for 150,000 with three being built and sold at the end of the first year, four in the second and four in the third year. The cost of capital for Henson is currently 12%.

Required:

1. Calculate the Payback Period for the investment in the warehouse. (5 marks)

2. Calculate the Net Present Value of the investment in the warehouse. (6 marks)

3. Calculate the Internal Rate of Return of the investment in the warehouse. (8 marks)

4. What is the maximum price that Henson can pay at the auction to cause the project to have a zero Net Present Value? (3 marks)

5. Briefly discuss whether the level of risk in this project high or low. (3 marks)