Based on the recent increase in residential property prices in Dublin a company has decided to...

 

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Based on the recent increase in residential property prices in Dublin a company has decided to diverse its investment portfolio and invest in property. The company is considering purchasing a newly constructed apartment block at an initial cost of €10 million plus a further payment of €3million in six months' time. Rents will be received annually in arears and are fixed at €2 million per annum for the next 10 years. At the end of the 10 years the apartment block will be sold for the fixed price of €5million. (i) (ii) (iii) (iv) Define and calculate the net present value (NPV) for this project at an effective rate of interest of 7% per annum. [4] Without doing any further calculations explain how the NPV in (i) above would alter if the interest rate used was greater than 7% per annum. [3] Define and calculate the discounted payback period for this project at an effective rate of interest of 7% per annum. [4] Discuss some risks to the company in undertaking this investment project. [4] Based on the recent increase in residential property prices in Dublin a company has decided to diverse its investment portfolio and invest in property. The company is considering purchasing a newly constructed apartment block at an initial cost of €10 million plus a further payment of €3million in six months' time. Rents will be received annually in arears and are fixed at €2 million per annum for the next 10 years. At the end of the 10 years the apartment block will be sold for the fixed price of €5million. (i) (ii) (iii) (iv) Define and calculate the net present value (NPV) for this project at an effective rate of interest of 7% per annum. [4] Without doing any further calculations explain how the NPV in (i) above would alter if the interest rate used was greater than 7% per annum. [3] Define and calculate the discounted payback period for this project at an effective rate of interest of 7% per annum. [4] Discuss some risks to the company in undertaking this investment project. [4]