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?