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.

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