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?
Correct Answer
A) Reject the investment because IRR is below required return
The investor should reject the investment because the IRR of 12% is below their required return of 15%. While the NPV is positive at a 10% discount rate, the investment doesn't meet the investor's specific return requirements.
Why This Is the Correct Answer
Option A 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.
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A commercial property in Toronto generates $120,000 in annual rental income and has operating expenses of $30,000. If the property sells for $900,000, what is the capitalization rate?
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A commercial investor is valuing a 10-year lease on 5,000 square feet at $30 per square foot in year one, with rent rising 3% each year. Rent is paid annually at the end of each year. Using a 7% discount rate, what is the present value of the lease payments, to the nearest dollar?