The CEO of PARC has asked your team to evaluate the potential for another site near the beach hotel. A prime property along the highway is available and he would like to develop a small shopping center that would include a restaurant and some shops. Based on his experience, he believes that the company will need to invest $45,000 to $60,000, uniformly distributed, on planning. In addition, he feels that the costs of construction are likely to average $1,150,000 with a standard deviation of $100,000. Mean annual rent profits are expected to be $245,000 with a standard deviation of $15,000. The company’s average cost of capital is 9%.
Using a simulation with 50 iterations, answer the following questions for the CEO:
What is the average IRR for the first 7 years of the project?
What is the average NPV for the same period?
Should the company invest in the project?