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: Hillcrest Apartments Yearly Aftertax Windy Acres Yearly Aftertax Cash Inflow Probability Cash Inflow 50,000 0.2 55,000 55,000 0.2 60,000 70,000 0.2 85,000 90,000 0.2 0.2 70,000 80,000 Probability 0.4 0.2 0.1 0.3 Mr. Backster is likely to hold the apartment complex of his choice for about 35 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 0.35-0.40 8% 12 Discount Rate (cost of capital) 16 Over 0.50 not considered 0.40-0.50
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: Hillcrest Apartments Yearly Aftertax Windy Acres Yearly Aftertax Cash Inflow Probability Cash Inflow 50,000 0.2 55,000 55,000 0.2 60,000 70,000 0.2 85,000 90,000 0.2 0.2 70,000 80,000 Probability 0.4 0.2 0.1 0.3 Mr. Backster is likely to hold the apartment complex of his choice for about 35 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 0.35-0.40 8% 12 Discount Rate (cost of capital) 16 Over 0.50 not considered 0.40-0.50
Chapter11: Capital Budgeting Decisions
Section: Chapter Questions
Problem 1PA: Your company is planning to purchase a new log splitter for is lawn and garden business. The new...
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Question
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nt
ences
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:
Hillcrest Apartments
Yearly Aftertax
Windy Acres
Yearly Aftertax
Cash Inflow
Probability
Cash Inflow
50,000
0.2
55,000
55,000
0.2
60,000
70,000
0.2
85,000
90,000
0.2
0.2
70,000
80,000
Probability
0.4
0.2
0.1
0.3
Mr. Backster is likely to hold the apartment complex of his choice for about 35 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
8%
12
Discount Rate
(cost of capital)
16
Over 0.50
not considered
0.35-0.40
0.40-0.50
a. Compute the risk-adjusted net present value for Windy Acres and Hillcrest Apartments. (Round "PV Factor" to 3 decimal places. Do
not round intermediate calculations. Round the final answers to nearest whole dollar.)
Windy Acres
Hillcrest Apartments
Net present value
$
$
L4 Which investment should Mc Daclater accent if the tun investment
mutually aveluciu?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F1e292ad3-101a-4872-872b-5f81307d44ea%2F8a0ee040-8498-4413-aa4d-e4c7dd13c113%2Fb0qsmhq_processed.jpeg&w=3840&q=75)
Transcribed Image Text:ped
nt
ences
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:
Hillcrest Apartments
Yearly Aftertax
Windy Acres
Yearly Aftertax
Cash Inflow
Probability
Cash Inflow
50,000
0.2
55,000
55,000
0.2
60,000
70,000
0.2
85,000
90,000
0.2
0.2
70,000
80,000
Probability
0.4
0.2
0.1
0.3
Mr. Backster is likely to hold the apartment complex of his choice for about 35 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
8%
12
Discount Rate
(cost of capital)
16
Over 0.50
not considered
0.35-0.40
0.40-0.50
a. Compute the risk-adjusted net present value for Windy Acres and Hillcrest Apartments. (Round "PV Factor" to 3 decimal places. Do
not round intermediate calculations. Round the final answers to nearest whole dollar.)
Windy Acres
Hillcrest Apartments
Net present value
$
$
L4 Which investment should Mc Daclater accent if the tun investment
mutually aveluciu?
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