Question 2 (15 marks] Note: round your answer to 2 decimal places unless stated otherwise. Ignore $, % and commas. For example, if your answer is 0.1256, write 0.13 Hongyi is quite happy with the performance of the optimal portfolio that you constructed in Question 1. He has recently cashed out some money to invest in other ventures. Property prices are falling due to recent rate hikes by the BA, so Hongyi believes that it is a good time to snap up a good investment property. After weeks of research and inspections, he decided to pay $1, 750, 000 for an investment property near World Square in the CBD. The amount is payable immediately (t = 0). Given the prime location and the rental crisis in Australia, Hongyi has already found a tenant for the property. He will receive a constant rental payment of $3, 500 per fortnight forever. Each rental payment is due at the beginning of each fortnight, so the first rental payment is due immediately. The interest rate is 8% p.a., compounded fortnightly. There are 52 weeks per year. Part a [3 marks] Calculate the net present value (NPV) of this investment. If your answer is negative, leave it as negative. $________

Part b [5 marks] Hongyi has decided to change his investment strategy. Instead of holding the property forever, he will sell it after ten years. The property currently has a market value of $1, 750, 000. Hongvi expects the market value of the property to grow at the rate of 2% per annum (compounded annually) over the next 10 years, after which he will sell it.

Calculate the expected market value of the property in 10 years.

$________

Assume that Hongyi can sell the property at this expected market value in ten years. In the meantime, he will receive fortnightly rental payments of $ 3. 500. As in part (a), each rental payment is due at the beginning of each fortnight, so the first rental payment is due immediately and the last rental payment is due two weeks before the property is sold. The interest rate applied to all cashflow items (including the income from the sale of the property) is still 8% p.a., compounded fortnightly.

Recalculate the NPV of the investment. $___________

Part c [7 marks] Suppose Hongyi has changed his mind yet again, and decided to stick with the investment strategy from part (a) (i.e., he will rent and hold the investment property forever). Evaluate the following statements. (Select True or False)

Statement I: if the interest rate were to be 16% p.a. compounded fortnightly (instead of 8% p.a. compounded fortnightly), then the NPV of the investment property would be higher. Assume that nothing else about the investment has changed.

Statement Il: if each rental payment is due at the end (instead of the start) of each fortnight over the next 10 years, so that the first rental payment is due in one fortnight, the NPV of the investment property would be higher. Assume that nothing else about the investment has changed.

Statement Ill: If rent were renegotiated so that the rental payments are $ 1750.0 per fortnight, (instead of $5, 500 per fortnight), with the first payment due immediately, then the NPV of the investment property would be higher. Assume that nothing else about the investment has changed.

Statement IV: If the interest rate were 4.0% p.a, compounded weekly (instead of 8% p.a. compounded fortnightly), then the NPV of the investment strategy would remain the same because 8% is twice of 4.0%.