It’s a Bond…It’s Solar Energy…It’s a Rental Property…Or, All of the Above?
A former mutual fund chief investment officer, Mike Atherton, was concerned about the future volatility of bonds in a likely environment of rising interest rates. The focus of the case concerns capital budgeting decisions about Mike’s real estate partnership, White Dove. Was the rental property business profitable enough to continue? Should solar electric panels be added to the partnership’s rental homes? How should the purchase of the homes be financed? In particular, Mike wanted to install solar panels in just one of two properties, a situation where NPV and IRR conflict. Mike was using this real estate investment to serve as a fixed-income component in his portfolio. Was the rental business a reasonable replacement for Mike’s municipal bonds? The case is flexible enough to allow the instructor to focus on one, or all, of these decisions.
- Evaluate a capital budgeting project using discounted cash flow, including determining an appropriate discount rate.
- Calculate internal rate of return, profitability index and scale-adjusted net present value and choose between mutually exclusive projects.
- Perform a sensitivity analysis to show the range in values for the project under varying scenarios.
- Explore alternatives to traditional bond investments for an investor looking for a fixed income portfolio.
- (Optional) Discuss governmental solar energy incentives and who pays and who benefits from these incentives.