Kaimalino Properties (KP) is evaluating six real estate investments. Management plans to buy
the properties today and sell them five years from today. The following table summarizes the
initial cost and the expected sale price for each property, as well as the appropriate discount rate
based on the risk of each venture.
Project Discount Rate Cost Today Expected Sale Price in Year 5
Green Hills 8% $3,000,000 $10,000,000
Ocean Park Estates 15% $15,000,000 $75,500,000
West Ranch 8% $9,000,000 $46,500,000
Lakeview 15% $9,000,000 $50,000,000
Seabreeze 8% $6,000,000 $35,500,000
Mountain Ridge 15% $3,000,000 $18,000,000
KP has a total capital budget of $18,000,000 to invest in properties.
a. What is the IRR of each investment?
b. What is the NPV of each investment?
c. Given its budget of $18,000,000, which properties should KP choose?
d. Explain why the profitably index method could not be used if KP's budget were $12,000,000
instead. Which properties should KP choose in this case?
Your tutorial illustrates how to lay out the data into a format that excel can use for NPV and IRR functions. Then the risk adjusted NPV is used to maximize risk-adjusted net PV given limited capital.