jawz

Which of the following statements is most accurate regarding the evaluation of real estate investments that require relatively large cash expenses during the life of the investment?

A) The recommendation of the IRR and NPV methods are likely to conflict.

B) Multiple internal rates may occur.

C) The IRR and NPV evaluation methods will conflict at relatively low discount rates.

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When there is a reversal in the signs of the investment’s cash flows, it is likely that multiple IRRs will exist. This renders the IRR evaluation approach ineffective.

jawz

Which of the following statements regarding the evaluation of mutually exclusive projects using the NPV and/or IRR approaches is least accurate?

A) Whenever a conflict exists between the IRR and NPV approaches, the project with the highest IRR should be selected.

B) Multiple IRRs are likely to exist when there is a relatively large change in the direction of investment’s cash flows.

C) Ranking conflicts between the IRR and NPV methods are likely to result when the projects being evaluated have relatively large differences in the size of their cash flows.

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Whenever a conflict exists between the IRR and NPV approaches, the project with the highest NPV should be selected.

jawz

An investment consortium is evaluating two mutually exclusive real estate investment opportunities: a multi-unit apartment complex, and a local shopping center. This investment group requires a 9% after-tax return on equity capital. For the apartment complex, net present value (NPV) and internal rate of return (IRR) analysis result in an NPV of USD7.5 million and an IRR of 11%. For the shopping center, the NPV is USD6.8 million and the IRR is 14%. If the investors require an after-tax return of 9% on either investment, which of the two investments should be undertaken?

A) The apartment complex because it has the highest NPV.

B) The shopping center should be selected because it has the highest IRR.

C) Both investments should be undertaken because they both have positive NPVs and their IRRs exceed the required return on equity.

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Since the projects are mutually exclusive, only one may be selected. When ranking conflicts exist between the IRR and NPV approaches, the project with the highest NPV should be selected.