solution

An investor has projected three possible scenarios for a project as follows:

Pessimistic—NOI will be $240,000 the first year, and then decrease 2 percent per year over a five-year holding period. The property will sell for $1.96 million after five years.

Most likely—NOI will be level at $240,000 per year for the next five years (level NOI) and the property will sell for $2.40 million.

Optimistic—NOI will be $240,000 the first year and increase 3 percent per year over a five-year holding period. The property will then sell for $3.00 million.

The asking price for the property is $2.40 million. The investor thinks there is about a 30 percent probability for the pessimistic scenario, a 40 percent probability for the most likely scenario, and a 30 percent probability for the optimistic scenario.

Required:

a. Compute the IRR for each scenario. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
b. Compute the expected IRR. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
c. Compute the variance and standard deviation of the IRRs. (Do not round intermediate calculations. Round “Variance” to 4 decimal places and “Standard deviation” to 2 decimal places.)