Ch.13-Web Assignment-pg380 - Chapter 14: Time, Opportunity,...

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Chapter 14: Time, Opportunity, Cost, and Value Decisions Robb Page 11-Mar-2010 FIN 497: Real Estate Principles Professor Clements Study Questions – pages 404-405. 1. Dr. Bob Jackson owns a parcel of land that a local farmer has offered to rent for the next 10 years. The farmer has offered to pay $20,000 today, or an annuity of $3,200 at the end of each of the next 10 years. Which payment method should Dr. Jackson accept if his required rate of return is 10 percent? NPV: Payout today = $20,000 (best option) Annuity plan = $19,662.61 2. You are able to buy an investment for $1,000 that gives you the right to receive $438 in each of the next three years. What is the internal rate of return on this investment? It yields a 15% return. 3. Calculate the present value of the income stream given below assuming discount rates of 8 percent and 20 percent. Year Income 1 $3000 2 4,000 3 6,000 4 1,000 With an 8% discount rate = $11,705.16. With a 20% discount rate = $9,232.25. 4. Calculate the IRR and NPV for the following investment opportunities. Assume a 16% discount rate for the NPV calculations: 1 Project 1 Project 2 Year Cash Flow Year Cash Flow 0 -$10,000 0 -$10,000 1 1,000 1 1,000 2 2,000 2 12,000 3 12,000 3 1,800
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Chapter 14: Time, Opportunity, Cost, and Value Decisions Ques. 4. continued… Internal rate of Return: Project 1 =16.16% Project 2 = 21.23% NPV: Project 1 = $36.29 Project 2 = $933.21 Assuming the projects are mutually exclusive then Project 2 is the better choice, because the higher NPV will increase the investment (net worth) by $933.21. 5. How much would you pay for an investment that provides $1,000 at the end of the first
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This note was uploaded on 04/25/2010 for the course FIN 497 taught by Professor Clements during the Spring '10 term at University of Missouri-Kansas City .

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Ch.13-Web Assignment-pg380 - Chapter 14: Time, Opportunity,...

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