the foxridge investment group

Project Description:

to model uncertainty in this decision problem, mr. hunter and his partner has decided that the growth in the rental income from one year to the next could vary uniformly from 2% to 6% in years 2 to 5. the v&c allowance in any year could be as low as 1% and as high as 5% with 3% being the most likely outcome. the operating expenses in each year should be normally distributed with a mean of 45% and standard deviation of 2% but should never be less than 40% and never greater than 50% of gross income. finally they believe the property value growth rate could be as small as 1% or as large as 5% with 2,5% being the most likely.
1. revise the spreadsheet show in figure 12.48 and 12.49 to reflect the uncertainties outlined.
2. construct a 95% confidence interval for the average total npv the foxridge investment group can expect if they undertake this project. interpret this confidence interval.
3. based on your analysis, what is the probability of this project generating a positive total npv if the group uses a 12% discount rate?
4. suppose the investors are willing to buy the propoerty if the expected total npv is greater than zero. based on your analysis should they buy it or not?
5. assume the investors decide to increase the discount rate to 14% and repeat questions 2, 3 and 4.
6. what discount rate results in a 90% chance of the project generating a positive total npv?
7. suppose a competitor can enter and serve the same market as yours. given the current economic conditions, the competitor is expected to enter the market only in year 4 or 5. the probability that the competitor will enter in year 4 is 0.3, and if the competitor does not enter in year 4, she will enter in year 5 with probability 0.5. (obviously, if the competitor enters in year 4, she will also serve the market in year 5.)
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