The table below shows two 10-year cash flow projections (in $ millions, including reversion) for the same property. The upper row is the projection that will be presented by the broker trying to sell the building; the bottom row is the realistic expectations. Suppose that it would be relatively easy for any potential buyers to ascertain that the most likely current market value for the property is about $10 million. (a) What going-in IRR (blended rate) will equate the presented cash flow projection to the observable $10 million present value (as of Year 0)? (b) What rate will equate the realistic projection to that same present value? (c) What is the most likely amount of "disappointment" in the ex post rate of return earned by an investor who buys this property believing the broker's cash flow projection (i.e., difference in presented vs realistic return)? Years 1 2 4 7 8. 10 Present $1.0 $1.0 $1.05 |$1.07 | $1.10 $1.131 $1.15 $1.18 $1.218 $13.05 ed 25 06 69 38 4 97 87 4 01 seller's broker Realisti $1.0 $1.0 $1.00 $1.00 $1.00 | $1.00 | $1.00 | $1.00 $1.000 | $11.00 00 00 00 00 00 00 00 00
The table below shows two 10-year cash flow projections (in $ millions, including reversion) for the same property. The upper row is the projection that will be presented by the broker trying to sell the building; the bottom row is the realistic expectations. Suppose that it would be relatively easy for any potential buyers to ascertain that the most likely current market value for the property is about $10 million. (a) What going-in IRR (blended rate) will equate the presented cash flow projection to the observable $10 million present value (as of Year 0)? (b) What rate will equate the realistic projection to that same present value? (c) What is the most likely amount of "disappointment" in the ex post rate of return earned by an investor who buys this property believing the broker's cash flow projection (i.e., difference in presented vs realistic return)? Years 1 2 4 7 8. 10 Present $1.0 $1.0 $1.05 |$1.07 | $1.10 $1.131 $1.15 $1.18 $1.218 $13.05 ed 25 06 69 38 4 97 87 4 01 seller's broker Realisti $1.0 $1.0 $1.00 $1.00 $1.00 | $1.00 | $1.00 | $1.00 $1.000 | $11.00 00 00 00 00 00 00 00 00
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:The table below shows two 10-year cash flow projections (in $ millions, including
reversion) for the same property. The upper row is the projection that will be presented
by the broker trying to sell the building; the bottom row is the realistic expectations.
Suppose that it would be relatively easy for any potential buyers to ascertain that the
most likely current market value for the property is about $10 million. (a) What going-in
IRR (blended rate) will equate the presented cash flow projection to the observable $10
million present value (as of Year 0)? (b) What rate will equate the realistic projection to
that same present value? (c) What is the most likely amount of "disappointment" in the
ex post rate of return earned by an investor who buys this property believing the broker's
cash flow projection (i.e., difference in presented vs realistic return)?
Years
1
2
4
6.
8.
9.
10
Present
$1.0 $1.0
$1.05 | $1.07
$1.10
$1.131 $1.15
$1.18
$1.218
$13.05
ed
25
06
69
38
4
97
87
4
01
seller's
broker
Realisti
$1.0 $1.0
$1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.000 $11.00
00
00
00
00
00
00
00
00
00
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