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?

Answer rating: 100% (QA)

IRR internal rate of return is the rate at which the present value of cash out flows in a particulai investment is equal to the present value of cash ... View the full answer