The Table Below Shows the Projected Cash Flows (Including Reversion)

question 4

Essay

The table below shows the projected 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 cash yields) of 8%, then which statement below correctly describes the relative investment risk in the two properties?
$$\begin{array}{l}\text { Aruual net cash flow projections for two properties (\$ millions) }\\\begin{array} { | l | r | r | r | r | r | r | r | r | r | r | } \hline \mathrm { Ye } & 1 & 2 & 3 & 4 & 5 & 6 & 7 & \mathbf { 8 } & 9 & 10 \\\mathrm { ar } & & & & & & & & \\\hline \mathrm { A } & \$ 1.00 & \$ 1.03 & \$ 1.06 & \$ 1.09 & \$ 1.12 & \$ 1.15 & \$ 1.19 & \$ 1.22 & \$ 1.26 & \$ 18 \\& 00 & 00 & 09 & 27 & 55 & 93 & 41 & 99 & 68 & 10 \\\hline \mathrm { B } & \$ 1.00 & \$ 1.00 & \$ 1.00 & \$ 1.00 & \$ 1.00 & \$ 1.00 & \$ 1.00 & \$ 1.00 & \$ 1.00 & \$ 13 \\& 00 & 00 & 00 & 00 & 00 & 00 & 00 & 00 & 00 & 50 \\\hline\end{array}\end{array}$$
(a) Property A is more risky. (A's going-in IRR = 8% + 3% = 11% = rf + RPA > rf + RPB = 8% = 8% + 0% = B's going-in IRR.)
(b) Property B is more risky.
(c) Both properties are equally risky.

---

Definitions:

Asset Turnover

A financial ratio that measures the efficiency of a company’s use of its assets in generating sales revenue.

Sales Revenue

The gross revenue is the entirety of income that comes from selling products or services, prior to deducting any costs.

Total Invested Capital

The sum of a company's equity and debt capital, representing the total amount of capital invested in the business.

Profit Margin

A financial performance ratio that shows the percentage of profit a company makes for each dollar of sales.