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Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy the properties today and sell them five years from today.
The following table summarizes the initial cost and the expected sale price for each? property, as well as the appropriate discount rate based on the risk of each venture.
Project
Cost Today
Discount Rate?(%)
Expected Sale
Price in Year 5
Mountain Ridge
?$3,000,000
15
?$18,000,000
Ocean Park Estates
15,000,000
75,500,000
Lakeview
9,000,000
50,000,000
Seabreeze
6,000,000
3,000,000
8
10,000,000
West Ranch
46,500,000
KP has a total capital budget of $18,000,000 to invest in properties.
a. What is the IRR of each investment?
b. What is the NPV of each investment?
c. Given its budget of $18,000,000 which properties should KP choose?
d. Explain why the profitability index method could not be used if KP's budget were $12,000,000 instead. Which properties should KP choose in this case?
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