Question: 2. The projected net cash flows for two properties (A and B) are shown in the following table: Annual Net Cash Flow Projections for two

2. The projected net cash flows for two properties (A and B) are shown in the following table:

Annual Net Cash Flow Projections for two properties ($ millions)

Year

1

2

3

4

5

6

7

8

9

10

A

1

1.01

1.0201

1.0303

1.0406

1.0510

1.0615

1.0721

1.0829

12.0305

B

1

.9900

.9801

.9703

.9606

.9510

.9415

.9321

.9227

10.0487

Assume a purchase price of $10 Million for both properties.

(a) What is the expected total return (IRR) on a 10-year investment in each property? Use a

financial calculator or equation solver for this.

(b) If the 10% cap rate represents a fair market value for each property, then which property must

be the riskier investment, so that no mispricing has occurred?

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