Apartment Purchase and Sale - IRR Estimate "Asking Price" (Initial Investment): $ Thousands $ 200 Annual Cash Flow from Tenants' Rent: $ Thousands 12 Rental Income Growth Rate: % 3.0% Apartment Sale Value: $ Thousands 225 Cash Flows: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Rental Income: $ 12 $ 12 $ 13 $ 13 $ 14 Property (Purchase) / Sale: (200) 225 Net Cash Flows: $ (200) $ 12 $ 12 $ 13 $ 13 $ 239 Internal Rate of Return (IRR): 8.5% Which of the following statements about this analysis is/are NOT valid? a. If this 8.5% IRR exceeds the expected annualized return on other, similar apartments in this area, then this apartment may be a better investment option than the others. b. You could have come up with a quick approximation for the IRR by observing that $12/$200 = 6.0%, and $25 / $200 = 12.5%; 12.5% / 5 = 2.5%, and 6.0% + $2.5% = 8.5%. c. This 8.5% IRR means that if you invested $200,000 and earned 8.5% on it each year, compounded annually, then you'd end up with the $239,000 total shown at the end of Year 5. d. This 8.5% IRR means that if you invested $200,000 and earned 8.5% on it each year, compounded annually, then you'd end up with the ~$289,000 in total cash flows shown over Years 1 - 5. e. Statements 2, 3, and 4 are all invalid. f. Statements 2 and 3 are invalid. g. Statements 3 and 4 are invalid.
Apartment Purchase and Sale - IRR Estimate "Asking Price" (Initial Investment): $ Thousands $ 200 Annual Cash Flow from Tenants' Rent: $ Thousands 12 Rental Income Growth Rate: % 3.0% Apartment Sale Value: $ Thousands 225 Cash Flows: Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Rental Income: $ 12 $ 12 $ 13 $ 13 $ 14 Property (Purchase) / Sale: (200) 225 Net Cash Flows: $ (200) $ 12 $ 12 $ 13 $ 13 $ 239 Internal Rate of Return (IRR): 8.5% Which of the following statements about this analysis is/are NOT valid? a. If this 8.5% IRR exceeds the expected annualized return on other, similar apartments in this area, then this apartment may be a better investment option than the others. b. You could have come up with a quick approximation for the IRR by observing that $12/$200 = 6.0%, and $25 / $200 = 12.5%; 12.5% / 5 = 2.5%, and 6.0% + $2.5% = 8.5%. c. This 8.5% IRR means that if you invested $200,000 and earned 8.5% on it each year, compounded annually, then you'd end up with the $239,000 total shown at the end of Year 5. d. This 8.5% IRR means that if you invested $200,000 and earned 8.5% on it each year, compounded annually, then you'd end up with the ~$289,000 in total cash flows shown over Years 1 - 5. e. Statements 2, 3, and 4 are all invalid. f. Statements 2 and 3 are invalid. g. Statements 3 and 4 are invalid.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
You’re considering purchasing an apartment for $200,000. You believe that you can earn an
initial rental income of $12,000 per year on it and that the rental income will grow at 3% per
year. You also believe that you can sell the apartment for $225,000 after 5 years. The IRR
calculation is shown below:
Transcribed Image Text:Apartment Purchase and Sale - IRR Estimate
"Asking Price" (Initial Investment):
$ Thousands
$
200
Annual Cash Flow from Tenants' Rent:
$ Thousands
12
Rental Income Growth Rate:
%
3.0%
Apartment Sale Value:
$ Thousands
225
Cash Flows:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Rental Income:
$
12 $
12 $
13 $
13 $
14
Property (Purchase) / Sale:
(200)
225
Net Cash Flows:
$
(200) $
12 $
12 $
13 $
13 $
239
Internal Rate of Return (IRR):
8.5%
Which of the following statements about this analysis is/are NOT valid?
a. If this 8.5% IRR exceeds the expected annualized return on other, similar apartments
in this area, then this apartment may be a better investment option than the others.
b. You could have come up with a quick approximation for the IRR by observing that
$12/$200 = 6.0%, and $25 / $200 = 12.5%; 12.5% / 5 = 2.5%, and 6.0% + $2.5% =
8.5%.
c. This 8.5% IRR means that if you invested $200,000 and earned 8.5% on it each year,
compounded annually, then you'd end up with the $239,000 total shown at the end
of Year 5.
d. This 8.5% IRR means that if you invested $200,000 and earned 8.5% on it each year,
compounded annually, then you'd end up with the ~$289,000 in total cash flows
shown over Years 1 - 5.
e. Statements 2, 3, and 4 are all invalid.
f. Statements 2 and 3 are invalid.
g. Statements 3 and 4 are invalid.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education