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    NVP AND IRR Task

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    Kelly Milagros Orozco Rosales
    The document discusses net present value (NPV) and internal rate of return (IRR) calculations for an office development real estate project. It provides examples of calculating NPV under different construction cost and interest rate scenarios. It also shows an example of calculating the IRR of a project that involves an initial cost, annual rental income for 3 years, and sale of the building in the third year. The key financial metrics - NPV and IRR - are used to evaluate the viability and attractiveness of the real estate investment project under varying conditions.

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    NVP AND IRR Task

    Uploaded by

    Kelly Milagros Orozco Rosales
    72 views4 pages
    The document discusses net present value (NPV) and internal rate of return (IRR) calculations for an office development real estate project. It provides examples of calculating NPV under different construction cost and interest rate scenarios. It also shows an example of calculating the IRR of a project that involves an initial cost, annual rental income for 3 years, and sale of the building in the third year. The key financial metrics - NPV and IRR - are used to evaluate the viability and attractiveness of the real estate investment project under varying conditions.

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    NVP AND IRR task

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    The document discusses net present value (NPV) and internal rate of return (IRR) calculations for an office development real estate project. It provides examples of calculating NPV under different construction cost and interest rate scenarios. It also shows an example of calculating the IRR of a project that involves an initial cost, annual rental income for 3 years, and sale of the building in the third year. The key financial metrics - NPV and IRR - are used to evaluate the viability and attractiveness of the real estate investment project under varying conditions.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    72 views4 pages

    NVP AND IRR Task

    Uploaded by

    Kelly Milagros Orozco Rosales
    The document discusses net present value (NPV) and internal rate of return (IRR) calculations for an office development real estate project. It provides examples of calculating NPV under different construction cost and interest rate scenarios. It also shows an example of calculating the IRR of a project that involves an initial cost, annual rental income for 3 years, and sale of the building in the third year. The key financial metrics - NPV and IRR - are used to evaluate the viability and attractiveness of the real estate investment project under varying conditions.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Ricardo Palma University

    Faculty: Economic and Business Science

    School: Global Business Administration

    Professor: Carlos, González Taranco

    Curso: Corporate Finance

    Group: 1

    NVP AND IRR EXERCISES

    Author

    Kelly Milagros Orozco Rosales

    June 17, 2020 – Lima, Perú

    2020-I
    NPV AND IRR EXERCISES

    Suppose that you are in the real estate business. You are considering construction of an office
    block. The land would cost $50,000, and construction would cost a further $300,000. You
    foresee a shortage of office space and predict that a year from now you will be able to sell the
    building for $400,000. Thus you would be investing $350,000 now in the expectation of
    realizing $400,000 at the end of the year.

    A) If the opportunity cost of capital were 8%, is the real state project a good
    business?

    r= interest rate = 0.08

    X * (1+ r) = 400000

    X*(1+0.08) = 400000

    X = 400000/1.08

    X = 370370.370

    Here, we have to invest 370370.370 in order to get 400000 at the end of 1 year.

    In this case it is a good business because you get more in one year than the money that
    you invest, so you get utilities.

    B) What is the office development’s NPV if construction costs increase to


    $355,000? Assume the opportunity cost of capital is 12%. Is the development still
    a worthwhile investment? How high can development costs be before the project
    is no longer attractive? Now suppose that the opportunity cost of capital is 20%
    with construction costs of $355,000. Why is the office development no longer an
    attractive investment?

    Even if construction costs are $355,000, NPV is still positive:

    NPV = PV – $355,000

    NPV = $357,143 – $355,000

    NPV = $2,143

    Comment:

    Therefore, the project is still worth pursuing. The project is viable as long as
    construction costs are less than the PV of the future cash flow, that is, as long as
    construction costs are less than $357,143.
    However, if the opportunity cost of capital is 20 percent, the PV of the $400,000 sales
    price is lower and NPV is negative:

    PV = $400,000 × 1/1.2

    PV = $333,333

    NPV = PV – $355,000

    NPV= –$21,667.

    The present value of the future cash flow is not as high when the opportunity cost of
    capital is higher. The project would need to provide a higher payoff in order to be
    viable in the face of the higher opportunity cost of capital.

    C) If you expect to receive a rent of $ 16,000 during three years and you expect to
    sell the building at $ 475,000 at the third year, calculate IRR.

    Using the formula:

    The details of cost incurred and cash inflows year wise as follows :

    Year 0 : $ 350,000 as cost ( $300,000 construction + $50,000 land cost)

    Year 1 : Cash inflow $ 16,000 ( annual rent )

    Year 2 : Cash inflow $ 16,000 ( annual rent)


    Year 3 : Cash inflow $475,000( sell of building)

    Discounting rate, It has been taken as annual interest rate of 8%

    Accordingly Net Present Value - NPV, $

    0= - 350,000 + 16,000/( 1 + IRR) + 16,000 / ( 1 +I RR)^2 + + 491,000/(1+ IRR)^3

    IRR =14.87%

    THE IRR IS 14.87%

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