Calculate expected irr on equity and the standard deviation

Reference no: EM131326693

Use the same information as in problem. Now assume a loan for $1.5 million is obtained at a 10 percent interest rate and a 15-year term.
a. Calculate the expected IRR on equity and the standard deviation of the return on equity.

b. Contrast the results from (a) with those from problem 3. Has the loan increased the risk? Explain.

Problem:-
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?

Reference no: EM131326693

Questions Cloud

How does management use feedback at the ranch : What types of conflict resolutions do the Clarks deal with at The Ranch? Can you answer any of these questions? You'll find answers to these questions and learn more about The Ranch Golf Club and its leadership throughout the chapter. To learn mor..

Economic-policy-challenges-macroeconomics-and-fiscal-policy : Principles of economics Please write a summary of the video below economic-policy-challenges-macroeconomics-and-fiscal-policy.

Discuss about the criminal justice feild on media : In a concise one page analysis, identify the crime and describe how the crime is portrayed. Next, explain how the medium itself influences the reader's understanding of what took place. Make sure you describe the type of framing used in your examp..

Moroccan monetary authority : Using official intervention, what does the Moroccan monetary authority have to do to keep the exchange rate at $0.12 per dirham? If private investors and speculators believe that the $0.12 per dirham exchange rate is not sustainable, and the exch..

Calculate expected irr on equity and the standard deviation : Calculate the expected IRR on equity and the standard deviation of the return on equity.- Contrast the results from (a) with those from problem 3. Has the loan increased the risk? Explain.

What is moral relativism according to one of the authors : explaining what Moral Relativism is and explaining the argument for it from Cultural Relativism,explaining what you think is the strongest argument against Moral Relativism is,and either constructing a reply to this argument or defending Moral Object..

What leadership qualities does pastor osteen possess : If there were some concerns that Osteen's staff/ ministers were not meeting the needs of church members in the one-on-one counseling sessions, how should Pastor Osteen conduct an effective feedback session to ensure greater success?

Find at least two articles from the proquest database : Find at least two articles from the ProQuest database that highlight and discuss two of the biggest challenges facing financial managers today.

How much should the developer be willing to pay : A developer plans to start construction of a building in one year if at that point rent levels make construction feasible.- How much should the developer be willing to pay for the land if he wants a 12 percent rate of return?

User Account

All Pages