LOS b: Evaluate a real estate investment using net present value (NPV) and internal rate of return (IRR) analysis from the perspective of an equity investor.

Q1. Savannah Walton analyzes venture-capital opportunities for the Mixon University endowment. She is considering an investment in Xavier’s Fine Paper. Management seeks $12 million to fund expansion.

The number of shares Mixon must receive to do this deal is closest to:

A)   2.09 million.

B)   4.36 million.

C)   14.03 million.

Q2. real estate investment is expected to have cash flows after taxes in each of the next three years equal to CAD70,000, CAD50,000, and CAD65,000, respectively. The initial equity investment in this property is CAD600,000 and the equity reversion after taxes (ERAT) at the end of year-three is estimated to be CAD300,000. Assuming an after tax return on equity of 8 percent, the net present value (NPV) for this investment is closest to:

A)   -CAD202,569.

B)   -CAD238,150.

C)   CAD202,569.

Q3. A real estate investment is expected to have cash flows after taxes in each of the next three years equal to CAD70,000, CAD50,000, and CAD65,000, respectively. The initial equity investment in this property is CAD600,000 and the equity reversion after taxes (ERAT) at the end of year three is estimated to be CAD500,000. The internal rate of return (IRR) for this investment is closest to:

A)   5.0%.

B)   8.0%.

C)   -7.8%.

Q4. A real estate investment is expected to have cash flows after taxes in each of the next four years equal to GBP90,000, GBP55,000, GBP35,000, and GBP25,000, respectively. The initial equity investment in this property is GBP200,000 and the equity reversion after taxes (ERAT) at the end of year-four is estimated to be GBP100,000. Assuming an after tax return on equity of 8.5%, the net present value (NPV) and internal rate of return (IRR) for this investment is closest to:

NPV                        IRR

A)  GBP47,268             18%

B)  GBP45,376             16%

C)  GBP41,399             15%