An investor has projected three possible scenarios for a project as follows: PessimisticNOI will be $200,000 the
Question:
An investor has projected three possible scenarios for a project as follows:
Pessimistic—NOI will be $200,000 the first year, and then decrease 2 percent per year over five-year holding period. The property will sell for $1.8 million after five years.
Most likely—NOI will be level at $200,000 per year for the next five years (level NOI) and the property will sell for $2 million.
Optimistic—NOI will be $200,000 the first year and increase 3 percent per year over a five-years holding period. The property will then sell for $2.2 million.
The asking price for the property is $2 million. The investor thinks there is about a 30 percent probability for the pessimistic scenario, at 40 percent probability for the most likely scenario, at
a 30 percent probability for the optimistic scenario.
a Compute the IRR for each scenario.
b. Compute the expected IRR.
c. Compute the variance and standard deviation of the IRRs.
d. Would this project be better than one with a 12 percent expected return and a standard deviation of 4 percent?Real Estate Finance and Investments
ISBN: 978-0073377339
14th edition
Authors: William Brueggeman, Jeffrey Fisher