The projected cash flows (including reversion) are shown in the following table for property A and property B.

a. If both properties sell at a cap rate (initial cash yield) of 10 percent, what is the expected total return on a 10-year investment in each property?

b. If the 10 percent cap rate represents a fair market value for each property, then which property is the more risky investment (and how do you know)?

c. What is the annual growth rate in operating cash flows for each building during the first nine years?

d. How is this growth rate related to the cap rate and the investors expected total return (IRR) in each property?

Year 1 9 10 Annual Net Cash Flow Projections for Two Properties ($ millions) 2 3 4 5 6 7 8 $1.0100 $1.0201 $1.0303 $1.0406 $1.0510 $1.0615 $1.0721 $0.9900 $0.9801 $0.9703 $0.9606 $0.9510 $0.9415 $0.9321 $1.0829 $1.0000 $1.0000 $12.1399 $9.9573 B $0.9227 Year 1 9 10 Annual Net Cash Flow Projections for Two Properties ($ millions) 2 3 4 5 6 7 8 $1.0100 $1.0201 $1.0303 $1.0406 $1.0510 $1.0615 $1.0721 $0.9900 $0.9801 $0.9703 $0.9606 $0.9510 $0.9415 $0.9321 $1.0829 $1.0000 $1.0000 $12.1399 $9.9573 B $0.9227