NPV in property investment

5) A property can be purchased for 15 000 000 today. A real estate analyst who likes risk analysis is analyzing the expected IRR and risk, measured as the standard deviation, of the real estate investment by projecting five different scenarios as follows:

Severe recession: NOI will be 900 000 the first year, and then decrease 3.5 percent per year until year six. The property will sell for 10 000 000 in year six. The probability for this scenario is 5 percent.

Moderate recession: NOI will be 900 000 the first year, and then decrease 1.5 percent per year until year six. The property will sell for 12 000 000 in year six. The probability for this scenario is 15 percent.

Baseline forecast: NOI will be level 900 000 per year for the next six years. The property will sell for 16 000 000 in year six. The probability for this scenario is 35 percent.

Moderate expansion: NOI will be 900 000 the first year, and then increase by 2.0 percent per year until year six. The property will sell for 18 000 000 in year six. The probability for this scenario is 30 percent.

Strong boom expansion: NOI will be 900 000 the first year, and then increase 3.0 percent per year until year six. The property will sell for 20 000 000 in year six. The probability for this scenario is 15 percent.

6) MCQ 5 continued. If the required rate of return (the discount rate) is 12 % for each of the five scenarios in MCQ 5, then the standard deviation of the NPV is__________

A) 1 545 432. B) 12 %. C) 2 985 884 D)1545432 . E) None of the above (A, B, C, D) is close to be correct.