Question

Suppose you have developed the following information for a potential investment: current market value is $1,200,000;...

Suppose you have developed the following information for a potential investment:

current market value is $1,200,000; anticipated loan to value ratio is .80 with 2

points; and predicated cash flows of ATCF1 = $38,560, ATCF2 = $41,780, ATCF3 =

$37,210, ATCF4 = $39,127, and ATER4 = $191,730. Further, assume the investor's

minimum required after-tax rate of return on equity is 12%.

a. What is the internal rate of return on this potential investment?

b. What is the profitability index on this investment?

Homework Answers

Answer #1
Total market value 1200000
Loan to value ratio 0.80
Debt value 960,000.00
Equity of investor 240,000.00
Year 0 1 2 3 4
Cash flows -240,000.00 38560 41780 37210 39127
Terminal cash flow 191730
Total cash flow -240,000.00 38,560.00 41,780.00 37,210.00 230,857.00
a Internal rate of return 12.14% It is that rate of return at which the Net present value of all the above cash flows becomes 0.
Calculated using IRR formula and above cash flows in excel
Required rate of return 12%
b Present value of cash flows 240,934.47
Initial investment 240000
Profitability Index 1.004 (Present value of cash flows/Initial Investment)
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