Fight Finance

Courses  Tags  Random  All  Recent  Scores

Scores
keithphw$6,001.61
Jade$1,795.80
Yuan$1,726.43
Zin$1,629.43
zy$1,619.70
Carolll$1,522.43
Visitor$1,433.33
Visitor$1,428.33
Visitor$1,395.80
Visitor$1,363.33
Visitor$1,308.61
Emma Lu$1,300.00
cuiting1$1,300.00
cuiting$1,299.70
Visitor$1,251.28
Visitor$1,073.33
mm11$1,050.33
Nisrita$1,050.33
Tijo$1,043.33
ninalee$1,039.70
 

Question 532  mutually exclusive projects, NPV, IRR

An investor owns a whole level of an old office building which is currently worth $1 million. There are three mutually exclusive projects that can be started by the investor. The office building level can be:

  • Rented out to a tenant for one year at $0.1m paid immediately, and then sold for $0.99m in one year.
  • Refurbished into more modern commercial office rooms at a cost of $1m now, and then sold for $2.4m when the refurbishment is finished in one year.
  • Converted into residential apartments at a cost of $2m now, and then sold for $3.4m when the conversion is finished in one year.

All of the development projects have the same risk so the required return of each is 10% pa. The table below shows the estimated cash flows and internal rates of returns (IRR's).

Mutually Exclusive Projects
Project Cash flow
now ($)
Cash flow in
one year ($)
IRR
(% pa)
Rent then sell as is -900,000 990,000 10
Refurbishment into modern offices -2,000,000 2,400,000 20
Conversion into residential apartments -3,000,000 3,400,000 13.33
 

Which project should the investor accept?




Copyright © 2014 Keith Woodward