An investor has projected three possible scenarios for a project as follows: PessimisticNOI will be $200,000 the
Question:
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 a 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-year 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, a 40 percent probability for the most likely scenario, and 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?
Expected ReturnThe expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...
Step by Step Answer:
Real Estate Finance and Investments
ISBN: 978-0073377339
14th edition
Authors: William Brueggeman, Jeffrey Fisher