Question: Should I make the investment in this property based on the information have given? Use the Excel IRR function to come up with your advice. Please explain.
Question: Should I make the investment in this property based on the information have given? Use the Excel IRR function to come up with your advice. Please explain.
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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Question
I currently have $5,000,000 invested in a fund of common stock of different commercial real estate properties. I expect the return on this investment to be 17% per year over the next 10 years.
I have an opportunity to invest in a commercial property in Brooklyn. The property costs $5,000,000. I will not borrow to finance the purchase, (no mortgage). My advisers have given me the following data on net operating income;
|
Year
|
Cash Flow (NOI)
|
|
0
|
-$5,000,000
|
|
1
|
$450,000
|
|
2
|
$450,000
|
|
3
|
$450,000
|
|
4
|
$450,000
|
|
5
|
$450,000
|
|
6
|
$450,000
|
|
7
|
$450,000
|
|
8
|
$450,000
|
|
9
|
$450,000
|
|
10
|
$450,000+ $7,000,000
|
The cash flow at year zero is negative because I buy the property. It’s a cash outflow . The cash flow at the end of year 10 includes the sales price.
The net operating income of the property for the next 10 years is $450,000. I will plan to sell the property at the end of year 10 for $7,000,000. My investment rule is; to invest in the property if the Internal Rate of Return is greater than 18%.
Question: Should I make the investment in this property based on the information have given? Use the Excel IRR function to come up with your advice. Please explain.
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