Question

Your property has the below after-tax cash flow profile over the next five years. You are either going to hang on to the property or invest into a renovation project, which costs $100,000. If your expected return is 15 percent, do you go ahead with the renovation? What is the incremental IRR?

Year	Atax CF	Atax CFr
0		-100,000
1	20000	18500
2	22000	25000
3	24000	31000
4	26000	40000
5	225000	375000

Answer 1

The below screenshot shows the calculation of NPV in excel for the given two cases:

As can be seen from the above, hanging on to the property has higher NPV rather than investing into the renovation project. So, one shouldn't go ahead with the renovation project.

The below screenshot shows the calculation of incremental cash flows and incremental IRR of the renovation project over the existing property:

So, incremental IRR= 12%