Question 1 [16 marks, one mark each]

The Model:

We buy a house to rent out for $800,000 in Coquitlam. We spend $20,000 immediately in fees and spend another $50,000 on renovations today.

We take out a mortgage for all of these expenses and pay 4.25% compounded annually on this money.

We anticipate earning $15,000 in profits (after all mortgage payments and other monthly expenses have been paid) in the first year.

We anticipate a growth rate in our profits to be 2, 3, 4, 5 or 6% per year (with an equal likelihood of each rate occurring).

We plan on owning the house for 25 years. At the end of 25 years, we gift the house to family and make no more profits on it.

See the excel file for the template for this model.

Calculate the following variables:

1. The yearly growth rate
2. The cash flows per year
3. The net present value (NPV)
4. The internal rate of return (IRR)
5. The productivity index (PI)

Run the Monte Carlo simulation 100 times and calculate the following statistics based off of your replications:

6. The average net present value
7. The standard deviation of the net present value
8. The minimum net present value
9. The maximum net present value
10. The 5% percentile
11. The future value of the business at the end of the 25 years.

Answer the following questions based off of your results:

12. Should we invest in this business/investment? ____________________

13. There is a 5% chance we will earn more than what amount in 25 years? _______________
14. What is the lowest amount we might earn in 25 years time? _________________
15. What is the highest amount we will earn in 25 years time? ______________________
16. The average amount your investment will be worth, on average, in 25 years time?____________