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; YearCash Flow (NOI)0-$5,000,0001$450,000 2$450,0003$450,0004$450,0005$450,0006$450,0007$450,0008$450,0009$450,00010$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.

IRR refers to the internal rate of return. It is that rate at which the NPV (net present value)…

Answered: Question: Should I make the investment…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter26: Real Options

Section: Chapter Questions

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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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