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 20,000 25,000 40,000 55,000 60,000 Coefficient of Variation 0-0.35 0.35-0.40 0.40-0.50 Over 0.50 Probability 0.2 Windy Acres Hillcrest Apartments 0.2 0.2 0.2 0.2 O Windy Acres O Hillcrest O Both O None 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 $140,000. 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 7% 10 14 Hillcrest Apartments not considered Yearly Aftertax Cash Inflow 25,000 30,000 40,000 50,000 (cost of capital) Probability 0.2 0.3 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.) 0.4 0.1 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 20,000 25,000 40,000 55,000 60,000 Coefficient of Variation 0-0.35 0.35-0.40 0.40-0.50 Over 0.50 Probability 0.2 Windy Acres Hillcrest Apartments 0.2 0.2 0.2 0.2 O Windy Acres O Hillcrest O Both O None 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 $140,000. 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 7% 10 14 Hillcrest Apartments not considered Yearly Aftertax Cash Inflow 25,000 30,000 40,000 50,000 (cost of capital) Probability 0.2 0.3 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.) 0.4 0.1 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:Problem 13-21
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
20,000
25,000
40,000
55,000
60,000
Coefficient of
Variation
0-0.35
0.35-0.40
0.40-0.50
Over 0.50
Probability
0.2
0.2
0.2
Windy Acres
Hillcrest Apartments
0.2
0.2
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 $140,000. 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).
O Windy Acres
O Hillcrest
O Both
O None
Discount Rate
7%
10
14
not considered
Hillcrest Apartments
Yearly Aftertax
Cash Inflow
25,000
30,000
40,000
50,000
(cost of capital)
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.)
$
Probability
0.2
0.3
0.4
0.1
Net present value
b-1. Which investment should Mr. Backster accept if the two investments are mutually exclusive?
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