Three commercial real estate projects forecasted cash flows are given as follows:

Year

0

1

2

3

4

6

7

8

g

10

11

12

Proiect 1

($12,344,567)

$455,098

$1,807,514

$2,007,345

$3,124,879

$7,589,111

($1,200,560)

S11,010,344

$12.987,004

S15,043,193

$14.111,075.

$12,991,002

$12,706,154

Project 2.

($20,161.099)

$5.908,766

1$6,876,003

$8,989,102

$11.000,005

$9,023,445

$8,900,556

$7,854,333

$6,890,345

$6,671,203

$4.230,017

$2.009,778

($1,958,183)

Project 3

($14,003,333)

$2,940,105

$2,940,105

$2,940,105

$2,940,105

$2,940,105

$2,940,105

$2,940,105

$2,940,105

$2,940,105

$2,940,105

$2,940,105

$2,940.105

The appropriate possible yield curves for three difference scenarios are given as:

Year

0

9

10

11

12

Scenario 1 (55%)

3.76%

4.15%

4.45%

4.89%

5.05%

4.89%

4.65%

4.34%

4.11%

3.99%

3.66%

3.33%

2.89%

Scenario 2 (35%)

3.02%

3.15%

3.49%

3.83%

4.28%

4.50%

4.76%

4.91%

5.07%

5.19%

5.24%

5.30%

5.33%

Scenario 3 (10%)

4.14%

3.98%

3.59%

3.17%

2.99%

2.73%

2.33%

2.08%

1.85%

1.78%

1.76%

1.73%

1.71%

 

a. Plot each yield curve. Provide an economic intuition for each one 

What are NPVs of each project in each scenario?

What is the expected NPV of each project?

 Which project is more sensitive to the cash flows of year 1 to year 5? How do you determine that? Show your work.

What happens to NPVs if in each scenario an unexpected inflation of 3.39% per year needs to be factored in?

What happens to NPVs if in each scenario there is an unexpected deflation of 0.50% per year for years 1 to 5 and an unexpected inflation of 3.89% per year for years 6 to 12?