You\'re considering developing an industrial building and holding it as an inves

Question

You're considering developing an industrial building and holding it as an investment for 5 years. You estimate the total development costs to be $850,000. Annual cash flow is as follows Yr 1 Yr2 Yr 3 Yr4 Yr 5 $60,000 $65,000 $70,000 $75,000 $80,000 At the end of the 5th year you plan to sell the building for $1,000,000. Your discount rate is 10% 1. What is the Net Present Value (NPV)? 2. Based on the NPV rule, is this a good investment? 3. What is the Internal Rate of Return (IRR)? 4. Based on the IRR rule, is this a good investment? 5. What is the Profitability Index of the foregoing investment? 6. what is the maximum amount you can pay for this building and still achieve your target yield of 10%?

Explanation / Answer

NPV= $32,677.54

2) Yes becuase NPV is positive

3)IRR = 10.95%

4)Yes , because IRR >10%

5)PI = NPV/Initial investment = 0.0384

6) Maximum Amount = 850,000+NPV= $882,677.54

Time 0 1 2 3 4 5 Cash flows -$8,50,000 $60,000 $65,000 $70,000 $75,000 $10,80,000

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