Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy the properties today and sell them five years from today. The following table summarizes the initial cost and the expected sale price for each property, as well as the appropriate discount rate based on the risk of each venture. (Click on the following icon in order to copy its contents into a spreadsheet.) Project Mountain Ridge Ocean Park Estates Lakeview Seabreeze Green Hills West Ranch Cost Today $3,000,000 15,000,000 9,000,000 6,000,000 3,000,000 9,000,000 Discount Rate 15% 15% 15% 8% 8% 8% Expected Sale Price in Year 5 $18,000,000 75,500,000 50,000,000 35,500,000 10,000,000 46,500,000 KP has a total capital budget of $18,000,000 to invest in properties. a. What is the IRR of each investment? b. What is the NPV of each investment? c. Given its budget of $18,000,000, which properties should KP choose? d. Explain why the profitability index method could not be used if KP's budget were $12,000,000 instead. Which properties should KP choose in this case?

Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy the properties today and sell them five years from today. The following table summarizes the initial cost and the expected sale price for each property, as well as the appropriate discount rate based on the risk of each venture. (Click on the following icon in order to copy its contents into a spreadsheet.) Project Mountain Ridge Ocean Park Estates Lakeview Seabreeze Green Hills West Ranch Cost Today $3,000,000 15,000,000 9,000,000 6,000,000 3,000,000 9,000,000 Discount Rate 15% 15% 15% 8% 8% 8% Expected Sale Price in Year 5 $18,000,000 75,500,000 50,000,000 35,500,000 10,000,000 46,500,000 KP has a total capital budget of $18,000,000 to invest in properties. a. What is the IRR of each investment? b. What is the NPV of each investment? c. Given its budget of $18,000,000, which properties should KP choose? d. Explain why the profitability index method could not be used if KP's budget were $12,000,000 instead. Which properties should KP choose in this case?

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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Concept explainers

Real Estate

Real estate means ownership of land along with the assets and natural resources that exist on the land. These properties are in real/physical form which is tangible. Real estate simply means land or addition made to land permanently like constructing a residence or different buildings. People invest in real estate to either reside or for wealth creation. Many people investing in real estate further lend the place for occupation or businesses in return for a monthly payment.

Question

Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy the properties today and sell them five years from today. The following table summarizes the initial cost
and the expected sale price for each property, as well as the appropriate discount rate based on the risk of each venture. (Click on the following icon in order to copy its contents into
a spreadsheet.)
Project
Mountain Ridge
Ocean Park Estates
Lakeview
Seabreeze
Green Hills
West Ranch
Cost Today
$3,000,000
15,000,000
9,000,000
6,000,000
3,000,000
9,000,000
Discount Rate
15%
15%
15%
8%
8%
8%
Expected Sale Price in Year 5
$18,000,000
75,500,000
50,000,000
35,500,000
10,000,000
46,500,000
KP has a total capital budget of $18,000,000 to invest in properties.
a. What is the IRR of each investment?
b. What is the NPV of each investment?
c. Given its budget of $18,000,000, which properties should KP choose?
d. Explain why the profitability index method could not be used if KP's budget were $12,000,000 instead. Which properties should KP choose in this case?

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