Suppose you have developed the following information for a potential investment:

Question

Suppose you have developed the following information for a potential investment: current market value is $1,200,000; anticipated loan to value ratio is .80 with 2 points; and predicated cash flows of ATCF1 = $38,560, ATCF2 = $41,780, ATCF3 = $37,210, ATCF4 = $39,127, and ATER4 = $191,730. Further, assume the investor's minimum required after-tax rate of return on equity is 12%. a. What is the internal rate of return on this potential investment? b. What is the profitability index on this investment?

Explanation / Answer

Net Investments would be = 80% of 1200000= 240000

Cashflows would look like

IRR would be 12.14%

Profitability index would

NPV of cashflows/ Initial Investment

=38560/1.12 + 41780/(1.12)^2 + 37210/(1.12)^3 + 230857/(.12)^4)

=240,934.47/240,0000=1.0038

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