A commercial property investment analysis shows an IRR of 12% and an NPV of $150,000 using a 10% discount rate. An investor requires a minimum 15% return. What should the investor's decision be?

Q: What is the correct answer to: A commercial property investment analysis shows an IRR of 12% and an NPV of $150,000 using a 10% discount rate. An investor requires a minimum 15% return. What should the investor's decision be?

The correct answer is Reject the investment because IRR is below required return. Option B is correct because the IRR of 12% falls short of the investor's required return of 15%. In investment analysis, the IRR must meet or exceed the investor's hurdle rate for the investment to be acceptable. This is a fundamental principle in commercial real estate investment decision-making. Even though other metrics like NPV may appear favorable, failing to meet the required return threshold means the investment doesn't align with the investor's financial objectives and risk-return expectations.

Q: What background knowledge is needed for this Commercial Real Estate question?

IRR (Internal Rate of Return) is the discount rate that makes NPV equal to zero, representing the investment's effective annual return. NPV (Net Present Value) calculates the present value of future cash flows minus initial investment using a specific discount rate. The required rate of return (hurdle rate) is the minimum return an investor demands, considering risk, opportunity cost, and market conditions. In commercial real estate, these metrics help evaluate investment viability. Canadian commercial real estate professionals must understand these concepts for proper due diligence and client advisory services under provincial licensing requirements.

Q: What is a good way to remember the answer to this Commercial Real Estate question?

Think of IRR as a runner trying to clear a hurdle. The hurdle height is the required return rate. If the IRR runner can't clear the hurdle (required return), they're disqualified from the race (investment rejected), regardless of how they performed in practice rounds (positive NPV at lower rates). When you see IRR vs required return questions, visualize the hurdle race. Ask: 'Can the IRR runner clear the required return hurdle?' If not, reject the investment immediately, regardless of other positive metrics.

Q: What exam tip applies to this Commercial Real Estate question?

Always compare IRR directly to the stated required return first. If IRR is below the required return, reject immediately. Don't be distracted by positive NPV calculated at different discount rates.

Q: How does this Commercial Real Estate concept apply in real world practice?

A commercial real estate broker in Toronto analyzes an office building investment for a client. The property shows 12% IRR and positive NPV at 10% discount rate. However, the client specifically stated they need 15% minimum return due to their portfolio strategy and risk tolerance. Despite the seemingly attractive metrics, the broker must advise rejection because it fails to meet the client's investment criteria, demonstrating professional duty to align recommendations with client objectives.

Question

Commercial Real EstateInvestment AnalysisONHARD

A commercial property investment analysis shows an IRR of 12% and an NPV of $150,000 using a 10% discount rate. An investor requires a minimum 15% return. What should the investor's decision be?

Answer Options

A

Accept the investment because NPV is positive

B

Reject the investment because IRR is below required return

C

Accept the investment because IRR exceeds the discount rate

D

Request additional analysis with a higher discount rate