Problem 13-21 (modified)

Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows:

Windy Acres			Hillcrest Apartments
Yearly Aftertax Cash Inflow	Probability		Yearly Aftertax Cash Inflow	Probability
30,000	0.2		35,000	0.2
35,000	0.2		40,000	0.4
50,000	0.2		50,000	0.2
65,000	0.2		60,000	0.2
70,000	0.2

Mr. Backster is likely to hold the apartment complex of his choice for about 25 years and will use this period for decision-making purposes. Either apartment can be purchased for $175,000. 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).

Coefficient of Variation	Discount Rate
00.35	7%
0.350.40	12	(cost of capital)
0.400.50	15
Over 0.50	not considered

a. Compute the risk-adjusted net present value for Windy Acres and Hillcrest Apartments. (Do not round intermediate calculations. Round the final answers to nearest whole dollar.) (If you're using the TVM funtions of a calculator to answer the question, then you can ignore this note. If you're using the PV tables at the back of the book to answer this question, round "PV Factor" to 3 decimal places.)

	Net present value
Windy Acres	$
Hillcrest Apartments	$

b-1. Which investment should Mr. Backster accept if the two investments are mutually exclusive?

multiple choice 1

• Hillcrest

• Windy Acres

• Both

• None

b-2. Which investment should Mr. Backster accept If the investments are not mutually exclusive and no capital rationing is involved?

multiple choice 2

• Windy Acres

• Hillcrest Apartments

• Both

• None