Question: A commercial real estate developer is considering several options for developing a piece of property. The initial investment required for each opportunity, along with the
A commercial real estate developer is considering several options for developing a piece of property.
The initial investment required for each opportunity, along with the expected cash flow at the end of the first year, the growth rate of the concern, and the cost of capital associated with each project is shown below:
| PROJECT | Initial Investment | CF at end of Year 1 | Growth in CF | Cost of Capital |
| Coffee Shop | $770,000 | $87,000 | 2.0% | 12.0% |
| Clothing Store | $500,000 | $60,500 | 3.0% | 14.0% |
| Convenience Store | $1,260,000 | $98,700 | 4.0% | 11.0% |
| Bike Shop | $980,000 | $94,400 | 5.0% | 13.0% |
It is assumed each investment will operate in perpetuity after the initial investment.
Question 1:
Which investment opportunity should the investor choose:
A.
Coffee Shop
B.
Clothing Store
C.
Convenience Store
D.
Bike Shop
Question 2:
The commercial real estate developer just received an offer from someone interested in purchasing the undeveloped property. The offer to purchase the property was for $180,000. Does this alter the decision made in question #1 above?
A.
No. My decision from Question #1 is still the most attractive option.
B.
Yes. The choice made in Question #1 is no longer the most attractive option.
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