Referring to the previous problem, Mr. Backster is likely to hold the apartment complex of his choice for about 10 years and will use this period for decision-making purposes. Either apartment can be purchased for $100,000. Mr. Backster uses a risk adjusted discount rate approach when evaluating investments. His scale is related to the coefficient of variation (for other types of investments, he also considers other measures).

a. Compute the risk-adjusted net present value for Windy Acres and Hillcrest Apartments using cash flow figures from the previous problem.
b. Which investment should Mr. Backster accept if the two investments are mutually exclusive? If the investments are not mutually exclusive and no capital rationing is involved, how would your decision be affected?

Coefficient of variation 0-0.35 0.35-0.40 Discount rate 12% 14 (cost of capital) 0.40-0.50 16 Over 0.50 not considered