a. Compute the risk-adjusted net present value for Windy Acres and Hillcrest Apartments. (Round "PV Factor" to 3 decimal places. Enter the answers in thousands of dollars. Do not round intermediate calculations. Round the final answers to nearest whole dollar.) Net present value $ Windy Acres Hillcrest Apartments b-1. Which investment should Mr. Backster accept if the two investments are mutually exclusive? O Hillcrest Windy Acres Both None b-2. Which investment should Mr. Backster accept If the investments are not mutually exclusive and no capital rationing is involved? Windy Acres Hillcrest Apartments Both 13 Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows: Windy Acres Yearly Aftertax Cash Inflow Hillcrest Apartments Yearly Aftertax Probability Cash Inflow Probability 70,000 0.2 75,000 0.2 75,000 0.2 80,000 0.3 90,000 0.2 90,000 105,000 110,000 0.2 0.2 100,000 0.4 0.1 Mr. Backster is likely to hold the apartment complex of his choice for about 25 years and will use this period for decision-making purposes. Either apartment can be purchased for $200,000. Mr. Backster uses a risk-adjusted discount rate approach when evaluating investments. His scale is related to the coefficient of variation (for other types of investments, he also considers other measures). Coefficient of Variation 0-0.35 Discount Rate 7% 0.35-0.40 10 (cost of capital) 0.40-0.50 14 Over 0.50 not considered • Common the cicle adiveted not recent unlun for Windy Ann and Hillerant Angemont Daund "OV En" on 2 decimal place
a. Compute the risk-adjusted net present value for Windy Acres and Hillcrest Apartments. (Round "PV Factor" to 3 decimal places. Enter the answers in thousands of dollars. Do not round intermediate calculations. Round the final answers to nearest whole dollar.) Net present value $ Windy Acres Hillcrest Apartments b-1. Which investment should Mr. Backster accept if the two investments are mutually exclusive? O Hillcrest Windy Acres Both None b-2. Which investment should Mr. Backster accept If the investments are not mutually exclusive and no capital rationing is involved? Windy Acres Hillcrest Apartments Both 13 Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows: Windy Acres Yearly Aftertax Cash Inflow Hillcrest Apartments Yearly Aftertax Probability Cash Inflow Probability 70,000 0.2 75,000 0.2 75,000 0.2 80,000 0.3 90,000 0.2 90,000 105,000 110,000 0.2 0.2 100,000 0.4 0.1 Mr. Backster is likely to hold the apartment complex of his choice for about 25 years and will use this period for decision-making purposes. Either apartment can be purchased for $200,000. Mr. Backster uses a risk-adjusted discount rate approach when evaluating investments. His scale is related to the coefficient of variation (for other types of investments, he also considers other measures). Coefficient of Variation 0-0.35 Discount Rate 7% 0.35-0.40 10 (cost of capital) 0.40-0.50 14 Over 0.50 not considered • Common the cicle adiveted not recent unlun for Windy Ann and Hillerant Angemont Daund "OV En" on 2 decimal place
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:a. Compute the risk-adjusted net present value for Windy Acres and Hillcrest Apartments. (Round "PV Factor" to 3 decimal places.
Enter the answers in thousands of dollars. Do not round intermediate calculations. Round the final answers to nearest whole
dollar.)
Net present
value
$
Windy Acres
Hillcrest Apartments
b-1. Which investment should Mr. Backster accept if the two investments are mutually exclusive?
O Hillcrest
Windy Acres
Both
None
b-2. Which investment should Mr. Backster accept If the investments are not mutually exclusive and no capital rationing is involved?
Windy Acres
Hillcrest Apartments
Both
13
Transcribed Image Text:Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two
apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows:
Windy
Acres
Yearly Aftertax
Cash Inflow
Hillcrest
Apartments
Yearly Aftertax
Probability
Cash Inflow
Probability
70,000
0.2
75,000
0.2
75,000
0.2
80,000
0.3
90,000
0.2
90,000
105,000
110,000
0.2
0.2
100,000
0.4
0.1
Mr. Backster is likely to hold the apartment complex of his choice for about 25 years and will use this period for decision-making
purposes. Either apartment can be purchased for $200,000. Mr. Backster uses a risk-adjusted discount rate approach when evaluating
investments. His scale is related to the coefficient of variation (for other types of investments, he also considers other measures).
Coefficient of
Variation
0-0.35
Discount Rate
7%
0.35-0.40
10
(cost of capital)
0.40-0.50
14
Over 0.50
not considered
• Common the cicle adiveted not recent unlun for Windy Ann and Hillerant Angemont Daund "OV En" on 2 decimal place
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
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education