Growing e seued au paau a se pu u Su a pae gndd u looking for an investment opportunity. She is convinced that a bank will be willing to finance an investment in a housing business. Her preliminary study revealed that housing units that are closer to the college can earn more in rent than those that are farther from the college. However, the earnings from the housing that are close to the college may be inconsistent because of constant moving by the students. In addition, there's the possibility that certain classes may be moved online in the future, thereby reducing students' patronage. Meanwhile, the houses that o p saqa n p s paq a pn ae constantly like students, thereby guaranteeing more steady income. The bank has offered to finance either of the two projects at a 5% interest rate compounded annually. She used historical data to estimate the expected revenue from the two investments over a period of 20 years.
Project A:
Initial Investment: $1,100,000
Year Cash Inflow
1: $121,500
2: $165,000
3: $121,500
4: $168,000
5: $121,500
6: $170,000
7: $121,500
8: $150,000
9: $121,500
10: $150,000
11: $121,500
12: $125,000
13: $121,500
14: $125,000
15: $121,500
16: $128,000
17: $121,500
18: $115,000
19: $121,500
20: $110,000
Project B:
Initial Investment: $1,200,000
Year Cash Inflow
1: $121,500
2: $165,000
3: $121,500
4: $168,000
5: $121,500
6: $170,000
7: $121,500
8: $150,000
9: $121,500
10: $150,000
11: $121,500
12: $125,000
13: $121,500
14: $115,000
15: $121,500
16: $115,500
17: $121,500
18: $95,000
19: $121,500
20: $101,500
NPV IRR
a. Determine the net present value (NPV) and Internal rate of return (IRR) of both investments and identify the more preferred project under each of the project evaluation methods. Note: There is a conflict between NPV and IRR in the project decision.
b. If the NPV and IRR do not reach a consensus on a particular project, identify the cause of the conflict and explain how NPV and IRR are affected by the cause of the conflict. If both NPV and IRR identify different projects as being more financially viable, discuss the reasons for the discrepancy.