Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows:

Windy

AcresHillcrest

ApartmentsYearly Aftertax

Cash InflowProbabilityYearly Aftertax

Cash InflowProbability40,0000.245,0000.445,0000.250,0000.260,0000.260,0000.175,0000.270,0000.380,0000.2

Mr. Backster is likely to hold the apartment complex of his choice for about 30 years and will use this period for decision-making purposes. Either apartment can be purchased for $150,000. Mr. Backster uses a risk-adjusted discount rate approach when evaluating investments. His scale is related to the coefficient of variation (for other types of investments, he also considers other measures).

Coefficient of VariationDiscount Rate0-0.356%0.35-0.4010(cost of capital)0.40-0.5015Over 0.50not considered

a.Compute the risk-adjusted net present value for Windy Acresand Hillcrest Apartments.(Do not round intermediate calculations. Round the final answers to nearest whole dollar.) (If you're using the TVM funtions of a calculator to answer the question, then you can ignore this note. If you're using the PV tables at the back of the book to answer this question, round "PV Factor" to 3 decimal places.)

Net present valueWindy Acres$Hillcrest Apartments$

b-1.Which investment should Mr. Backster accept if the two investments are mutually exclusive?

• Hillcrest
• Windy Acres
• Both
• None

b-2.Which investment should Mr. Backster accept If the investments are not mutually exclusive and no capital rationing is involved?

• Windy Acres
• Hillcrest Apartments
• Both
• None