The variance and standard deviation of the IRRs

Assignment Help Financial Management

Reference no: EM131868202

An investor has projected three possible scenarios for a project as follows: a. Pessimistic: NOI will be $200,000 the first year, and then decrease 2 percent per year over a 5-year holding period. The property will sell for $1.8mm after five years. b. Most likely: NOI will be level at $200,000 per year for the next five years (level NOI) and the property will sell for $2mm after five years. c. 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 $2.2mm. The asking price for the property is $2mm. 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. Compute the following:

a. The IRR for each scenario

Pessimistic: _______________ Most likely: _______________ Optimistic: _______________

b. The expected IRR

c. The variance and standard deviation of the IRRs

Variance: __________ Standard Deviation: ____________

d. Would this project be better than one with a 12 percent expected return and a standard deviation of 4 percent? Why?

Reference no: EM131868202

Questions Cloud

Why would someone else not make the given purchases : How would you choose one outlet, brand, or model over the others? Would others make the same choices in the same way? Why and why not?

Bond price vary more than the price of the shorter-term bond : Why does the longer-term bond's price vary more than the price of the shorter-term bond when interest rates change?

Discuss about the marketing management : Cultural misunderstanding is common in doing business globally because managers tend to use their own cultural values and priorities when they make decisions.

Why is financial planning important in corporations : Why is Financial Planning Important in Corporations? Explain.

The variance and standard deviation of the IRRs : An investor has projected three possible scenarios for a project as follows: The variance and standard deviation of the IRRs

What is yearly interest rate being offered by the dealer : What is the yearly interest rate being offered by the dealer? (to the? customer)?

Hedging instrument that the investor has to sell : What is the quantity f of the hedging instrument that the investor has to sell? We suppose that the YTM curve increases instantaneously by 0.1%.

Behind saving at the beginning of the current month : How will his results change is he behind saving at the beginning of the current month?

Short sell the stocks in the market index : Assuming you short sell the stocks in the market index, how high and low can the futures price be without giving rise to arbitrage opportunities?

User Account

All Pages