Question #1:

You and your business partner identify a vacant piece of land zoned for apartment use which you can purchase for $5 million today (an amount which will need to be paid immediately).

After detailed analysis you find that constructing apartments will take one year and cost $2.5 million (which will need to be paid at the end of Year 1).

Once the buildings are completed (at the end of the first year), you plan on renting out the spaces at annual profit (after all expenses) of $600,000 to be received at the end of each of the three years following the completion of the development (ex: your first $600,000 payment will be received at the end of Year 2).

Finally, having established a track record, you plan on selling the buildings for $8.5 million at the end of the fourth year.

Q1(b). Assuming your discount rate is 9.0%, what is the NPV of this project?Show your work by setting up the complete NPV equation (do not use Excel's NPV function...we'll learn more about that later).

Q1(c). Should you undertake this project?Why or why not? Explain with reference to the NPV rule.

Question #2:

Q2(a). What is the Net Income Multiplier for in each of the markets below?Show your work and round to the nearest $0.01.

Market A:6.25% Capitalization Rate

Market B:7.50% Capitalization Rate

Market C:14.50% Capitalization Rate

Q2(b). Briefly explain the significance of the Net Income Multiplier.What does it tell an investor about the market as a whole?What can it tell an investor about a specific investment opportunity?