Rafael owned an apartment building that burned down. The empty lot is worth $70,
ID: 2614971 • Letter: R
Question
Rafael owned an apartment building that burned down. The empty lot is worth $70,000 and Rafael has received $260,000 from the insurance company. Rafael plans to build another apartment building that will cost $235,000. His real estate adviser estimates that the expected value of the finished building on the real estate market will be $350,000 next year. The discount/interest rate is 10%. What are the NPV and IRR of this decision?
a) $13,182; 14.75%
b) -$83,182; -48.94%
c) $83,182; 48.94%
d) -$13,182; -14.75%
Explanation / Answer
The total cost of new building, inclusive of land, is $235,000 + $70,000 = $305,000.
The building is completed TODAY ITSELF & it is sold next year at $350,000,
NPV is $350,000/1.10 - $ $305,000 = $13,181.82; and
IRR is calculated by solving
$350,000/(1+r) = $305,000, and
r=0.147540984 or 14.75%
Hence, Option "A" is correct.
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