The Table Below Shows the Projected Net Cash Flows (Including

question 1

Multiple Choice

The table below shows the projected net cash flows (including reversion) for Property A and Property B. If both properties sell at fair market value for a cap rate (initial and terminal net cash yields) of 7%, then which statement below correctly describes the relative investment risk in the two properties? $$\begin{array}{l}\text { Arnuel net cast flow prajectians for twaprapeties (\$1,000,000) }\\\begin{array} { | l | r | r | r | r | r | r | r | r | r | r | } \hline \text { Year: } & 1 & \mathbf { 2 } & 3 & 4 & 5 & 6 & 7 & 8 & 9 & 10 \\\hline \mathbf { A } & \$ 1.0000 & \$ 1.0000 & \$ 1.0000 & \$ 1.0000 & \$ 1.0000 & \$ 1.0000 & \$ 1.0000 & \$ 1.0000 & \$ 1.0000 & \$ 15.2857 \\\hline \mathbf { B } & \$ 1.0000 & \$ 1.0200 & \$ 1.0404 & \$ 1.0612 & \$ 1.0824 & \$ 1.1041 & \$ 1.1262 & \$ 1.1487 & \$ 1.1717 & \$ 18.6093 \\\hline\end{array}\end{array}$$

• A) Property A is more risky.
• B) Property B is more risky. Because it's got a higher expected total return E[r] at equilibrium in the market (FMV).
• C) They both are equally risky.
• D) Insufficient information to determine the answer.

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