Question

QUIZ 3 III. Problem Solving Show your solution,
You are contemplating on building a housing project. The land costs $4.5M and the construction of a townhouse will cost P15.5M. You can sell the entire project in a year's time for P23M. Assuming an opportunity cost of capital of 6%, will you invest in the project? Why? Using the data in the problem, but with an opportunity cost of 16%, will you accept the project? Why?



2. A 5-year housing project costing P500,000 is projected to give the following annual returns:
Year 1 P75,000
Year 2 150,000
Year 3 225,000
Year 4 300,000
Year 5 350,000
Will you accept the project? Why?


3. If the project in number 2 showed a reversed annual return as follows:
Year 1 P350,000
Year 2 300,000
Year 3 225,000
Year 4 150,000
Year 5 75,000
Will you accept the project? Why?
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Answer 1

Answer:

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Answer 2

Explanation:

According to the given problem, land cost is 4.5 while construction cost is 15.5. So total cost of completing a house would be 20M.

Now if we sell this house in 23M within a year, it means that we can get a profit of 3M.

Now considering opportunity cost of capital of 6%, this means that after one year, for a price of 20M house, we can get 20 x (1.06) = 21.2M

Since 21.2 is less than 23M, so waiting for one year @ 6% is not a wise idea.

Now considering opportunity cost of capital of 16%, this means that after one year, for a price of 20M house, we can get 20 x (1.16) = 23.2M

Since 23.2 is more than 23M, so waiting for one year @ 16% is a wise idea.