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 30,000 35,000 50,000 65,000 70,000 Coefficient of Variation 0-0.35 0.35-0.40 0.40-0.50 Over 0.50 Probability 0.2 0.2 0.2 0.2 0.2 Windy Acres Hillcrest Apartments 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 $175,000. 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). Discount Rate 78 Hillcrest O Windy Acres O Both O None Hillcrest Apartments 12 15 not considered Yearly Aftertax Cash Inflow 35,000 40,000 50,000 60,000 Probability 0.2 (cost of capital) 0.4 0.2 0.2 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.) Net present value b-1. Which investment should Mr. Backster accept if the two investments are mutually exclusive?
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 30,000 35,000 50,000 65,000 70,000 Coefficient of Variation 0-0.35 0.35-0.40 0.40-0.50 Over 0.50 Probability 0.2 0.2 0.2 0.2 0.2 Windy Acres Hillcrest Apartments 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 $175,000. 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). Discount Rate 78 Hillcrest O Windy Acres O Both O None Hillcrest Apartments 12 15 not considered Yearly Aftertax Cash Inflow 35,000 40,000 50,000 60,000 Probability 0.2 (cost of capital) 0.4 0.2 0.2 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.) Net present value b-1. Which investment should Mr. Backster accept if the two investments are mutually exclusive?
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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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
30,000
35,000
50,000
65,000
70,000
Coefficient of
Variation
0-0.35
0.35-0.40
0.40-0.50
Over 0.50
Windy Acres
Hillcrest Apartments
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 $175,000. 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).
Hillcrest
Windy Acres
Probability
0.2
O Both
0.2
0.2
0.2
0.2
None
Discount Rate
7%
O Both
O None
Hillcrest Apartments
12
15
not considered
Yearly Aftertax
Cash Inflow
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.)
Net present value
35,000
40,000
50,000
60,000
b-1. Which investment should Mr. Backster accept if the two investments are mutually exclusive?
Probability
0.2
0.4
0.2
0.2
(cost of capital)
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
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