Two investments have the following pattern of expected cash flows and returns.

a. What is the equity-level internal rate of return for each investment?

b. Partition the IRR of each investment based on the cash flows from operations and the cash flows from the residual sale of the properties in year 4. What proportion of the returns come from the cash from operations and what proportion of the returns comes from the residual sale of the properties?

c. What is the implication of the proportions? If you were to compare the two investments, which investment would you expect to be riskier based on the above analysis?

Investment A Year Purchase Price Cash Flow from Operations Sales Proceeds Cash Flow Available to Equity 0 2 3 4 -$110,000 $5,000$10,000$12,000$15,000 $120,000 $5,000$10,000$12,000$135,000 -$110,000 Investment B Year Purchase Price Cash Flow from Operations Sales Proceeds Cash Flow Available to Equity 0 1 2 4 -$120,000 $2,000$4,000$1,000$15,000 $180,000 $1,000$195,000 -$120,000 $2,000 $4,000 Investment A Year Purchase Price Cash Flow from Operations Sales Proceeds Cash Flow Available to Equity 0 2 3 4 -$110,000 $5,000$10,000$12,000$15,000 $120,000 $5,000$10,000$12,000$135,000 -$110,000 Investment B Year Purchase Price Cash Flow from Operations Sales Proceeds Cash Flow Available to Equity 0 1 2 4 -$120,000 $2,000$4,000$1,000$15,000 $180,000 $1,000$195,000 -$120,000 $2,000 $4,000