In this question ch13 p1 of real estate finance& investment (it\'s a textbook pr
ID: 2785527 • Letter: I
Question
In this question ch13 p1 of real estate finance& investment (it's a textbook problem and I have solution book)
However, I don't understand the thinking and calculating process.
Investment A requires an outlay of $110,000 and Investment B requires an outlay of $120,000.
a. What is the BTIRR on each investment?
b. If the BTIRR were partitioned based on BTCF and BTCFs what proportions of the BTIRR
would be represented by each?
c. What do these proportions mean?
A OUTLAY 110000 B OUTLAY 120000 BTCF BTCF 5000 2000 10000 4000 12000 1000 15000 5000 sale)120000 (sale)180000Explanation / Answer
(All Figures are in $) Answer 1 Calculation Of BTIRR Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment A -110000 5000 10000 12000 15000 120000 BTIRR of A 9.2% (Use formulla in excel =IRR(Select Cell -110000 to 120000)) Investment B -120000 2000 4000 1000 5000 180000 BTIRR of B 10.2% (Remember IRR is the rate of return at which Cash Inflows and Cash Outflows become equal). We can check the same in next answer i.e. answer B Note: In practical life we calculate IRR through excel only. Because acdemically this can only be calculate through Trial and error method. Answer 2 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investment A -1,10,000 5,000 10,000 12,000 15,000 1,20,000 BTIRR of A 9.2% Now we will discount all the cash flows with IRR, We will get Discount factor = (1/1+BTIRR)^ no. of year 1.00 0.92 0.84 0.77 0.70 0.64 Discounted Cash flows -1,10,000 4,579 8,386 9,215 10,548 77,273 (We can check that sum of all cash flows are 0 at BTIRR) Proportion of BTIRR represented by each Cash flow = Say, Proportion for Year 1 = Year 1 discounted Cash Inflow /Sum of all year (Year1 to Year5 Discounted cash inflows). In the same manner we will calculate for all years) - 4% 8% 8% 10% 70% Investment B -120000 2000 4000 1000 5000 180000 BTIRR of B 10.2% Now we will discount all the cash flows with IRR, We will get Discount factor = (1/1+BTIRR)^ no. of year 1.00 0.91 0.82 0.75 0.68 0.62 Discounted Cash flows -1,20,000 1,815 3,294 747 3,390 1,10,754 (We can check that sum of all cash flows are 0 at BTIRR) Proportion of BTIRR represented by each Cash flow = Say, Proportion for Year 1 = Year 1 discounted Cash Inflow /Sum of all year (Year1 to Year5 Discounted cash inflows). In the same manner we will calculate for all years) 2% 3% 1% 3% 92% Year 1 Year 2 Year 3 Year 4 Year 5 Answer 3 Investment A - BTIRR Proportion 4% 8% 8% 10% 70% It means that we are able to generate (Cash Inflow) 4% Initial Investment amount in Year 1. It means that we are able to generate further(Cash Inflow) 8% Initial Investment amount in Year 2. It means that we are able to generate further (Cash Inflow) 8% Initial Investment amount in Year 3. It means that we are able to generate further (Cash Inflow) 10% Initial Investment amount in Year 4. It means that we are able to generate further(Cash Inflow) 70% Initial Investment amount in Year 5. Investment B - BTIRR Proportion The same explanation as stated above
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