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Npv & irr

ACA Shreya Shah (Employed) (90 Points)

03 July 2015

Hi friends,

Can anyone help me solve this ....

Rafael owned an apartment building that burned down. The empty lot is worth $50,000 and Rafael has received $330,000 from the insurance company. Rafael plans to build another apartment building that will cost $260,000. His real estate adviser estimates that the expected value of the finished building on the real estate market will be $355,000 next year. The discount/interest rate is 8%. What are the NPV and IRR of this decision?

Thanks in advance ...

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A. PEER MOHAMED (Finance Professional) (21 Points)
Replied 14 July 2015

Well, there are some unanswered data. (1) Rafael's new apartment costs $260,000, but this does not tell me whether the cost of land of $50,000 is included in the above $260,000; (2) Rafael only plans to build another apartment, but it does not tell with in how many months the new apartment would be buildup.

Let us assume that the total cost of new building, inclusive of land, is $260,000 + $50,000 = $310,000. The building is completed TODAY ITSELF & it is sold next year at $355,000, the NPV is $355,000/1.08 - $ $310,000 = $18,703.704 and the IRR is calculated by solving $355,000/(1+r) = $310,000, and r=0.14516129 or 14.52%