SECTION B: Compulsory Write a detailed paragraph containing an example where app
ID: 2614041 • Letter: S
Question
SECTION B: Compulsory Write a detailed paragraph containing an example where appropriate, to show your understanding of all EIGHT (8) of the following. Each answer is worth 5 marks. Q21 1. Explain carefully what the Net Present Value and the Internal Rate of Return (IRR) resulting from analysis of a proposed property investment indicates to the investor 2. Explain the principle of anticipation and the valuation method that it underpins 3. Outlining each step on your financial calculator, calculate the difference between the annual mortgage payment on a table loan of $420,000 at an interest rate of 4.99% and 5.5% with an amortisation period of 15 years 4. Briefly discuss this statement There is no capital gains tax on property in New Zealand' Explain why property market cycles are of interest to both investors and valuers 5. 6. Give an example of how a change to a District Plan could affect property values 7. How does the Residential Tenancies Act protect the interests of tenants? . What are the three types of Real Estate license and how are they diferent?Explanation / Answer
1)
The IRR is the discount rate that makes the present value of the future after tax cash flows equal to initial investment. The decision rule for the IRR is to invest if the IRR exceeds the required rate of return for project. If IRR falls below the required rate of return, the project should be rejected. IRR calculates the yield on an investment and is thus different than net present value (NPV) value of an investment.
Assume Company XYZ must decide whether to purchase a piece of factory equipment for $300,000. The equipment would only last three years, but it is expected to generate $150,000 of additional annual profit during those years. Company XYZ also thinks it can sell the equipment for scrap afterward for about $10,000. Using IRR, Company XYZ can determine whether the equipment purchase is a better use of its cash than its other investment options, which should return about 10%.
Here is how the IRR equation looks in this scenario:
0 = -$300,000 + ($150,000)/(1+.2431) + ($150,000)/(1+.2431)2 + ($150,000)/(1+.2431)3 + $10,000/(1+.2431)4
The investment's IRR is 24.31%
Net present value: Net present value is the present value of the future after tax cash flows minus the investment outlay. For example: an investment of $500,000 today is expected to return $100,000 of cash each year for 10 years. The $500,000 being spent today is already a present value, so no discounting is necessary for this amount. However, the future cash receipts of $100,000 for 10 years need to be discounted to their present value. Let's assume that the receipts are discounted by 14% (the company's required return). This will mean that the present value of the those future receipts will be approximately $522,000. The $522,000 of present value coming in is compared to the $500,000 of present value going out. The result is a net present value of $22,000 coming in
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.