Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows: Hillcrest Apartments Yearly Aftertax Windy Acres Yearly Aftertax Cash Inflow Probability Cash Inflow 50,000 0.2 55,000 55,000 0.2 60,000 70,000 0.2 85,000 90,000 0.2 0.2 70,000 80,000 Probability 0.4 0.2 0.1 0.3 Mr. Backster is likely to hold the apartment complex of his choice for about 35 years and will use this period for decision-making purposes. Either apartment can be purchased for $200,000. Mr. Backster uses a risk-adjusted discount rate approach when evaluating investments. His scale is related to the coefficient of variation (for other types of investments, he also considers other measures). Coefficient of Variation 0-0.35 0.35-0.40 8% 12 Discount Rate (cost of capital) 16 Over 0.50 not considered 0.40-0.50

Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows: Hillcrest Apartments Yearly Aftertax Windy Acres Yearly Aftertax Cash Inflow Probability Cash Inflow 50,000 0.2 55,000 55,000 0.2 60,000 70,000 0.2 85,000 90,000 0.2 0.2 70,000 80,000 Probability 0.4 0.2 0.1 0.3 Mr. Backster is likely to hold the apartment complex of his choice for about 35 years and will use this period for decision-making purposes. Either apartment can be purchased for $200,000. Mr. Backster uses a risk-adjusted discount rate approach when evaluating investments. His scale is related to the coefficient of variation (for other types of investments, he also considers other measures). Coefficient of Variation 0-0.35 0.35-0.40 8% 12 Discount Rate (cost of capital) 16 Over 0.50 not considered 0.40-0.50

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 1PA: Your company is planning to purchase a new log splitter for is lawn and garden business. The new...

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Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows: Windy Acres Yearly Aftertax Cash Inflow 10,000 Probability 0.1 15,000 30,000 45,000 50,000 0.2 0.4 0.2 0.1 Hillcrest Apartments Yearly Aftertax Cash Inflow Probability 15,000 20,000 30,000 60,000 0.2 0.3 0.4 0.1 Mr. Backster is likely to hold the apartment complex of his choice for about 25 years and will use this period for decision-making purposes. Either apartment can be purchased for $200,000, Mr. Backster uses a risk adjusted discount rate approach when evaluating investments. His scale is related to the coefficient of variation (for other types of investments, he also considers other measures). Coefficient of Variation 0-0.35 0.35-0.40 0.40-0.58 Over 8.58 Discount Rate 5% 9 13 not considered (cost of capital) a. Compute the…
Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows: Windy Acres Yearly Aftertax Cash Inflow Probability $50,000 0.2 55,000 70,000 85,000 90,000 0.2 0.2 0.2 0.2 Hillcrest Apartments Yearly Aftertax Cash Inflow Probability $55,000 0.4 60,000 0.2 70,000 0.1 80,000 0.3 a. Find the expected value of the cash flow for each apartment complex. (Enter the answers in thousands.) Windy Acres Expected cash flow $ Hillcrest Apartments $
Mr. John Backster, a retired executive, desires to invest a portion of his assets in rental property. He has narrowed his choices to two apartment complexes, Windy Acres and Hillcrest Apartments. The anticipated annual cash inflows from each are as follows: Windy Acres Yearly Aftertax Cash Inflow Probability $50,000 0.2 55,000 70,000 85,000 90,000 0.2 0.2 0.2 0.2 Hillcrest Apartments Yearly Aftertax Cash Inflow Probability $55,000 0.4 60,000 0.2 70,000 0.1 80,000 0.3 a. Find the expected value of the cash flow for each apartment complex. (Enter the answers in thousands.) Expected cash flow Windy Acres Hillcrest Apartments $ $ b. What is the coefficient of variation for each apartment complex? (Do not round intermediate calculations. Round the final answers to 4 decimal places.) Windy Acres Hillcrest Apartments Coefficient of variation c. Which apartment complex has more risk? O Hillcrest Apartments
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