Problem 23-1An institutional investor is comparing management fees for two competing real estate investment funds. Both funds expect to beginoperations and are accepting capital commitments. When the funds begin acquiring properties, capital calls will be made for capitalcontributions during the investment period. Fund A will charge a fee of 45 BP on capital committed and 60 BP on capital invested afterthe investment period ends. Fund B will charge a fee of 50 BP on capital committed and 55 BP on capital invested after the investmentperiod ends. Both funds expect to have $500,000,000 in capital commitments when the fund commences operations and both projecta five-year cycle for startup and acquisitions. Capital flows are expected as follows:Fund AYear 1Year 2Year 3Year 4Year 5Fund BYear 1Year 2Year 3Year 4Year 5ContributedCapital$ 200,000,000300,000,000ContributedCapital$ 300,000,000200,000,000CapitalReturned$000100,000,00050,000,000CapitalReturned$00050,000,000100,000,000Invested Capital$ 200,000,000500,000,000500,000,000400,000,000350,000,000Invested Capital$ 300,000,000500,000,000500,000,000450,000,000350,000,000Required:a. What will total fees be for Fund (A)? For Fund (B)?b. Would one of the fee structures cause the manager to want to hold the properties longer before selling than the other fee structure?if so, which one?Complete this question by entering your answers in the tabs below.

Real estate investment funds refer to the corporations that are used for managing the portfolios of…

Answered: An institutional investor is comparing…

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter15: Capital Investment Analysis

Section: Chapter Questions

Problem 15.6.4P

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TOPIC 6: CAPITAL BUDGETING TECHNIQUES ABC Manufacturing is considering two (2) mutually exclusive investments. The company wishes to use a CAPM-Type risk-adjusted discount rate (RADR) in its analysis. ABC's managers believe that the appropriate market rate of return is 10%, and they observe that the current risk-free rate of return is 5%. Cash flows associated with the two (2) projects are shown in the table below Project x $110,000 Project y $120,000 Year Net Cash Inflows (NCFt) 1 $40,000 $32,000 2 $40,000 $42,000 3 $40,000 $48,000 4 $40,000 $56,000 Answer the following questions: a. Use a risk-adjusted discount rate approach to calculate the net present value of each project, given that project X has a RADR factor (Risk Index) of 1.20 and project Y has an RADR factor (Risk Index) of 1.4. Please note that the RADR factors are similar to project betas. b. Discuss your findings in part a and recommend the preferred project.
Problem #2 - Chapter 13 – Preference Ranking for Investment Projects The management of Revco Products is exploring four different investment opportunities, Information on the four projects under study follows: Project C (450,000) 522,970 72,970 Project B (360,000) 433,400 73,400 Project A Description Investment Required ($) Present value of Cash Inflows ($) Net Present Value ($) Life of the Project (in years) Project D (270,000) 336,140 66,140 (480,000) 567,270 87,270 6 3 12 6 Internal Rate of Return (%) 18% 19% 14% 16% Because the company's required rate of return is 10%, a 10% discount rate has been used in the present value computations above. Limited funds are available for the investment, so the company cannot accept all the available projects. 1) Compute the project profitability index for each investment project. 2) Rank the four projects according to preference in terms of the following metrics: Net Present Value b. Project Profitability Index Internal Rate of Return a. c. 3)…
QUESTION THREE Bates Limited is considering investing in two capital investment projects. The expected capital expenditure and its related cash flows is given in the table below Details Period Project A (K) Project B (K) Cash Expenditure At outset 410,000 500,000 Cash inflow Year 1 140,000 170,000 Cash inflow Year 2 170,000 195,000 Cash inflow Year 3 135,000 180,000 Cash inflow Year 4 110,000 140,000 Your company considers its cost of capital to be 13%. For Project B, assessed as the riskier project of the two, a risk-adjusted cost of capital of 15% is considered appropriate. Base rate is presently 5% and the company pays a margin of 1%, giving an all in borrowing rate of 6%. Inflation is presently 3%. (a) Assess the two projects using the investment appraisal technique of internal rate of return (IRR). (b) State which project you would recommend to your board and explain in detail your reasons. (c) Besides the IRR…
An institutional investor is comparing management fees for two competing real estate investment funds. Both funds expect to begin operations and are accepting capital commitments. When the funds begin acquiring properties, capital calls will be made for capital contributions during the investment period. Fund A will charge a fee of 45 BP on capital committed and 60 BP on capital invested after the investment period ends. Fund B will charge a fee of 50 BP on capital committed and 55 BP on capital invested after the investment period ends. Both funds expect to have $505,000,000 in capital commitments when the fund commences operations and both project a five-year cycle for startup and acquisitions. Capital flows are expected as follows: Fund A Year 1 Year 2 Year 3 Year 4 Year 5 Fund B Year 1 Year 2 Year 3 Year 4 Year 5 Contributed Capital $ 202,000,000 303,000,000 Contributed Capital $ 303,000,000 202,000,000 Capital Returned $0 0 0 101,000,000 50,500,000 Capital Returned 0 0 50,500,000…
QUESTION FIVE Compare and contrast non-discounting methods and discounting methods used in investment appraisals. In the following case, advise whether the project is financially viable using one (01) non-discounting method and three (03) discounting methods of your choice: Bravo Investments Ltd Cost of Capital 10% Initial Cash Outlay K500,000.00 Year Annual Net Cash Flow 1 K100,000.00 2 K165,000.00 3 K180,000.00 4 K100,000.00 5 K170,000.00
An institutional investor is comparing management fees for two competing real estate investment funds. Both funds expect to begin operations and are accepting capital commitments. When the funds begin acquiring properties, capital calls will be made for capital contributions during the investment period. Fund A will charge a fee of 45 BP on capital committed and 60 BP on capital invested after the investment period ends. Fund B will charge a fee of 50 BP on capital committed and 55 BP on capital invested after the investment period ends. Both funds expect to have $506,000,000 in capital commitments when the fund commences operations and both project a five-year cycle for startup and acquisitions. Capital flows are expected as follows: Fund A Contributed Capital Capital Returned Invested Capital Year 1 $ 202,400,000 $ 0 $ 202,400,000 Year 2 303,600,000 0 506,000,000 Year 3 0 506,000,000 Year 4 101,200,000 404,800,000 Year 5 50,600,000 354,200,000 Fund B…
An institutional investor is comparing management fees for two competing real estate investment funds. Both funds expect to begin operations and are accepting capital commitments. When the funds begin acquiring properties, capital calls will be made for capital contributions during the investment period. Fund A will charge a fee of 45 BP on capital committed and 60 BP on capital invested after the investment period ends. Fund B will charge a fee of 50 BP on capital committed and 55 BP on capital invested after the investment period ends. Both funds expect to have $506,000,000 in capital commitments when the fund commences operations and both project a five-year cycle for startup and acquisitions. Capital flows are expected as follows: Fund A Year 1 Year 2 Year 3 Year 4 Year 5 Fund B Year 1 Year 2 Year 3 Year 4 Year 5 Contributed Capital $ 202,400,000 303,600,000 Contributed Capital $ 303,600,000 202,400,000 Required A Fund A Fund B Capital Returned $0 0 0 Required B 101,200,000…
All techniques: Decision among mutually exclusive investments Pound Industries is attempting to select the best of three mutually exclusive projects. The initial investment and subsequent cash inflows associated with these projects are shown in the following table. Cash flows Project A $30,000 $10,000 Project B Project C Initial investment (CF) $60,000 $21,500 $70,000 $22,500 Cash inflows (CF), t= 1 to 5 a. Calculate the payback period for each project. The NPv of projeci C is 017.10|. (Rouna to tne nearesi cEnt.) c. The IRR of project A is %. (Round to two decimal places.) The IRR of project B is %. (Round to two decimal places.) The IRR of project C is %. (Round to two decimal places.) d. Which project would you recommend? (Select the best answer below.) O A. Project C OB. Project B OC. Project A
Exhibit 8-3A firm is evaluating two investment proposals. The following data is provided for the two investment alternatives. Initial cash outflow IRR NPV(@14%) Project 1 $350m 28% $80m Project 2 $ 20m 36% $20m Refer to Exhibit 8-3. If the two projects are mutually exclusive, which project should the firm choose? What is the problem that the firm should be concerned with in making this decision? Group of answer choices project 1; project scale project 2; discount rate project 1; discount rate project 2; project scale
Problem 23-2 A closed-end, commingled opportunity fund is being created with an expected three-year life. It expects to acquire properties that it expects to turnaround and sell at the end of three years for a gain. It also plans a minimum target return of 10 percent to investors, which will be based on cash distributions from operations and from the sale of properties at the end of the life of the fund. The opportunity fund manager expects to receive a promote equal to 25 percent of cash flows remaining after sale of the assets and after equity investors receive their minimum 10 percent target return. Cash flows are expected as follows: Year 0 Year 1 Year 2 Year 3 Equity Investment $3,000,000 Cash Distributions from Operations to Equity Investors (After Management Fees) Required A $ 100,000 100,000 100,000 Required: a What must be the cash flows to equity investors at the end of year 3 in order to achieve their total target 10 percent return on equity Expected Sale Proceeds…
Question 16 of 30 View Policies Current Attempt in Progress -/0.35 ⠀ Crane Crafts Corp. management is evaluating two independent capital projects that will each cost the company $200,000. The two projects will provide the following cash flows: Year Project A Project B 1 $66,750 $26,450 2 93,450 66,125 3 34,235 143,250 4 151,655 98,110 (a1) What is the payback period of both projects? (Round answers to 2 decimal places, e.g. 15.25.) The Payback of Project A is years and Project B is eTextbook and Media Save for Later Using multiple attempts will impact your score. 20% score reduction after attempt 2 years. Attempts: 0 of 3 used Submit Answer (a2) The parts of this question must be completed in order. This part will be available when you complete the part above. Search ♡
Question 5 The Finance Director of Kawabwa Construction plc recently overhauled the control system and designed a new method of assessing capital investments that applies the NPV rule to all new investment proposals and will assess performance of current of investments by the same method. He has created a report that will go to the board of directors monthly. This will give an NPV estimation to the cash flows produced and expected by each investment, and CFO plans to use this as a signaling device on the performance of all investments. This, he claims, will introduce rigour into the whole use of capital process. The Chairman ventured the opinion that this approach was a receipt for disaster. Why do you think he felt this way?

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