Mr. Sam Golff desires to invest a portion of his assets in rental property. He has narrowed his choices down to two apartment complexes, Palmer Heights and Crenshaw Village. After conferring with the present owners, Mr. Golff has developed the following estimates of the cash flows for these properties.
Palmer Heights
Yearly aftertax
cash inflow
(in thousands) Probability
$ 20 .2
25 .2
40 .2
55 .2
60 .2
Crenshaw Village
Yearly aftertax
cash inflow
(in thousands) Probability
$ 25 .2
30 .3
40 .4
50 .1
Mr. Golff is likely to hold the complex of his choice for 20 years, and he will use this time period for decision-making purposes. Either apartment complex can be acquired for $140,000. Mr. Golff uses a risk-adjusted discount rate when considering investments. His scale is related to the coefficient of variation.
Coefficient of variation Discount rate
0 - 0.20 7 %
0.21 - 0.40 10 (cost of capital)
0.41 - 0.60 14
Over 0.60 20
(a) Compute the risk-adjusted net present values for Palmer Heights and Crenshaw Village. (Omit the "tiny_mce_markerquot; sign in your response.)
Net present value
Palmer Heights $
Crenshaw Village $