Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy the properties today and sell them five years from today. The following table summarizes the initial cost and the expected sale price for each property, as well as the appropriate discount rate based on the risk of each venture. Expected Sale Cost Today Discount Rate (%) Price in Year 5 $18,000,000 Project $3,000,000 Mountain Ridge 15 15,000,000 9,000,000 6,000,000 3,000,000 75,500,000 50,000,000 35,500,000 10,000,000 Ocean Park Estates 15 Lakeview 15 Seabreeze 8 Green Hills 8 West Ranch 9,000,000 8 46,500,000 KP has a total capital budget of $18,000,000 to invest in properties. a. What is the IRR of each investment? b. What is the NPV of each investment? c. Given its budget of $18,000,000, which properties should KP choose? d. Explain why the profitability index method could not be used if KP's budget were $12,000,000 instead Which properties should KP choose in this case? Fill in the IRR of each investment in the table above: (Round to two decimal places.)
Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy the properties today and sell them five years from today. The following table summarizes the initial cost and the expected sale price for each property, as well as the appropriate discount rate based on the risk of each venture. Expected Sale Cost Today Discount Rate (%) Price in Year 5 $18,000,000 Project $3,000,000 Mountain Ridge 15 15,000,000 9,000,000 6,000,000 3,000,000 75,500,000 50,000,000 35,500,000 10,000,000 Ocean Park Estates 15 Lakeview 15 Seabreeze 8 Green Hills 8 West Ranch 9,000,000 8 46,500,000 KP has a total capital budget of $18,000,000 to invest in properties. a. What is the IRR of each investment? b. What is the NPV of each investment? c. Given its budget of $18,000,000, which properties should KP choose? d. Explain why the profitability index method could not be used if KP's budget were $12,000,000 instead Which properties should KP choose in this case? Fill in the IRR of each investment in the table above: (Round to two decimal places.)
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
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Transcribed Image Text:Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy the
properties today and sell them five years from today. The following table summarizes the initial cost and
the expected sale price for each property, as well as the appropriate discount rate based on the risk of
each venture.
Expected Sale
Cost Today Discount Rate (%) Price in Year 5
$18,000,000
Project
$3,000,000
Mountain Ridge
15
75,500,000
50,000,000
35,500,000
10,000,000
Ocean Park Estates
15,000,000
9,000,000
6,000,000
3,000,000
15
Lakeview
15
Seabreeze
8
Green Hills
8.
West Ranch
9,000,000
46,500,000
KP has a total capital budget of $18,000,000 to invest in properties.
a. What is the IRR of each investment?
b. What is the NPV of each investment?
c. Given its budget of $18,000,000, which properties should KP choose?
d. Explain why the profitability index method could not be used if KP's budget were $12,000,000 instead.
Which properties should KP choose in this case?
Fill in the IRR of each investment in the table above: (Round to two decimal places.)
Expert Solution
Introduction
"Since you have posted a question with multiple sub-parts, we will solve first three parts for you. To get remaining sub-parts solved please repost the complete question and mention the sub-parts to be solved."
Capital budgeting is an accounting technique that helps to evaluate profitability and liquidity positions for long-term capital investments. It involves many methods like internal rate of return (IRR), and net present value (NPV).
The internal rate of return (IRR) method gives an interest rate at which the sum of present value of the future cash flows is equal to the initial outlay.
The net present value (NPV) method gives the potential profitability position in absolute dollar value.
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