# Fight Finance

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An investor owns an empty block of land that has local government approval to be developed into a petrol station, car wash or car park. The council will only allow a single development so the projects are mutually exclusive.

All of the development projects have the same risk and the required return of each is 10% pa. Each project has an immediate cost and once construction is finished in one year the land and development will be sold. The table below shows the estimated costs payable now, expected sale prices in one year and the internal rates of returns (IRR's).

 Mutually Exclusive Projects Project Costnow ($) Sale price inone year ($) IRR(% pa) Petrol station 9,000,000 11,000,000 22.22 Car wash 800,000 1,100,000 37.50 Car park 70,000 110,000 57.14

Which project should the investor accept?

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 $3.4m when the conversion is finished in one year. All of the development projects have the same risk so the required return of each is 10% pa. The table below shows the estimated cash flows and internal rates of returns (IRR's).  Mutually Exclusive Projects Project Cash flownow ($) Cash flow inone 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? An investor owns an empty block of land that was bought for$3 million a few years ago, but could be sold at auction for $2 million now. The land has local government approval to be developed into either: • Low-rise townhouses costing$11 million now (t=0) that can be rented for $2 million in the first year, paid at the end of that year (t=1), and then rent is expected to grow by 4% pa every year forever; or • High rise apartments costing$90 million now (t=0) that can be rented for \$14 million in the first year, paid at the end of that year (t=1), and then rent is expected to grow by 1% pa every year forever.

The government will only allow a single development so the projects are mutually exclusive.

These projects have the same risk and 9% pa required return. Both will be fully constructed in one year, at which point tenants will move in and pay rent annually in advance, with the growth rates given. Ignore all maintenance costs, tenant vacancies, taxes and so on. All answer options are rounded to 6 decimal places. Compare the two projects against selling the land. Which of the following statements is NOT correct?