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 130,000 135,000 150,000 165,000 170,000 0.1 135,000 0.2 140,000 0.4 150,000 0.2 0.1 160,000 Probability 0.2 0.3 0.4 0.1 Mr. Backster is likely to hold the apartment complex of his choice for about 20 years and will use this period for decision-making purposes. Either apartment can be purchased for $150,000. 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 0.40-0.50 Discount Rate 5% (cost of capital) 9 14 Over 0.50 not considered E 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 $ $ 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: Hillcrest Apartments Yearly Aftertax Windy Acres Yearly Aftertax Cash Inflow Probability Cash Inflow 130,000 135,000 150,000 165,000 170,000 0.1 135,000 0.2 140,000 0.4 150,000 0.2 0.1 160,000 Probability 0.2 0.3 0.4 0.1 Mr. Backster is likely to hold the apartment complex of his choice for about 20 years and will use this period for decision-making purposes. Either apartment can be purchased for $150,000. 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 0.40-0.50 Discount Rate 5% (cost of capital) 9 14 Over 0.50 not considered E 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 $ $ 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
Probability
130,000
135,000
150,000
165,000
170,000
0.1
0.2
0.4
0.2
0.1
Hillcrest Apartments
Yearly Aftertax
Cash Inflow
135,000
140,000
150,000
160,000
Probability
0.2
0.3
0.4
0.1
Mr. Backster is likely to hold the apartment complex of his choice for about 20 years and will use this period for decision-making
purposes. Either apartment can be purchased for $150,000. 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
(cost of capital)
0.35-0.40
0.40-0.50
Over 0.50
5%
9
14
not considered
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
$
$
b-1. Which investment should Mr. Backster accept if the two investments are mutually exclusive?
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