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Cost Today Sale Price in Year 3 Parkside Acres $550,000 $1,050,000 Real Property 870,000 1,470,000 Estates Lost Lake 540,000 940,000 Properties Overlook 50,000 250,000

Cost Today Sale Price in Year 3 Parkside Acres $550,000 $1,050,000 Real Property 870,000 1,470,000 Estates Lost Lake 540,000 940,000 Properties Overlook 50,000 250,000

Essentials Of Investments
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
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SOLVE ALL 4 PROFITABILITY INDEXS

Kartman Corporation is evaluating four different real estate investments. Management plans to buy the properties today and sell them three years from today. The annual discount rate for these investments is 11%. The following table summarizes the initial cost and the sale price in three years for each property: E. Kartman has a total capital budget of $600,000 to invest in properties. Which properties should it choose? .....
Transcribed Image Text:Kartman Corporation is evaluating four different real estate investments. Management plans to buy the properties today and sell them three years from today. The annual discount rate for these investments is 11%. The following table summarizes the initial cost and the sale price in three years for each property: E. Kartman has a total capital budget of $600,000 to invest in properties. Which properties should it choose? .....
Cost Today Sale Price in Year 3 Parkside Acres $550,000 $1,050,000 Real Property 870,000 1,470,000 Estates Lost Lake 540,000 940,000 Properties Overlook 50,000 250,000
Transcribed Image Text:Cost Today Sale Price in Year 3 Parkside Acres $550,000 $1,050,000 Real Property 870,000 1,470,000 Estates Lost Lake 540,000 940,000 Properties Overlook 50,000 250,000
Expert Solution
Step 1

Profitability index = PV of sales price/cost today

Parkside Acres PI = 1,050,000/(1.11^3)*550,000 = 1.40

Real Acres PI = 1,470,000/(1.11^3)*870,000 = 1.24

Lost Acres PI = 940,000/(1.11^3)*540,000 = 1.27

Overlook Acres PI = 250,000/(1.11^3)*50,000 = 3.66

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