Question: The following table shows two 10-year cash flow projections (in $ millions, including reversion) for the same property. The upper row is the projection that will be presented by the broker trying to sell the building, and the bottom row is the realistic expectations. Suppose that it would be relatively easy for any potential buyers to ascertain that the most likely current market value for the property is about $10 million.
a. What going-in IRR (blended rate) will equate the presented cash flow projection to the observable $10 million present value (as of year 0)?
b. What rate will equate the realistic projection to that same present value?
c. What is the most likely amount of ‘‘disappointment'' in the ex post rate of return earned by an investor who buys this property believing the broker's cash flow projection (i.e., the difference in presented versus realistic return)?
