Question
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
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 Acres
Yearly Aftertax Cash InflowProbability
10,000 = .1
15,000 = .2
30,000 = .4
45,000 = .2
50,000 = .1
Hillcrest Apartments
Yearly Aftertax Cash InflowProbability
15,000 = .2
25,000 = .3
35,000 = .4
45,000 = .1
Mr. Backster is likely to hold the apartment complex of his choice for about 10 years and will use this period for decision-making purposes. Either apartment can be purchased for $100,000. Mr. Backster uses a risk-adjusted discount rate approach when evaluating investments. His scale is related to the coefficient of variation (for other types of investments, he also considers other measures).
Coefficient of Variation
Discount rate0-0.3512%
0.35-0.40 14(cost of capital)
0.40-0.50 16
Over 0.50not considered
Expected Cash Flow
Windy Acres = 30,000
Hillcrest Apartments = 29,000
Coef. of variation :
WA = 0.4347
HA = 0.3162
a.Compute the risk-adjusted net present value for Windy Acresand Hillcrest.(Round "PV Factor" to 3 decimal places. Enter the answers in thousands of dollars. Do not round intermediate calculations. Round the final answers to nearest whole dollar.)
Net present value
Windy Acres$
Hillcrest$
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