Suppose you analyze a particular deal and it appears that for an investment of $1,000,000 your client can obtain a positive NPV of over $500,000. Your client is typical of the type of high tax bracket individual investors who commonly purchase and sell this type of property, and indeed typically determine equilibrium prices in the asset market in which these properties are sold. What should you do?
A) Reject the deal out of hand because it costs twice as much as its NPV.
B) Phone your client right away on your cell phone and urge her to pounce on this deal before it "gets away" - the seller must have made a mistake in their offering price!
C) Buy the property with cash, take out an 80% loan-to-value ratio mortgage, and laugh all the way to the bank with $200,000 of arbitrage profits!
D) Sharpen your pencil, double-check your assumptions and analysis, try to find what is unique about your client.

Question

Quizplus · Accepted Answer

The correct approach when an investment appears to offer a significantly positive NPV, especially one that seems too good to be true, is to carefully review your analysis and assumptions. This ensures that no errors have been made and that the unique characteristics of the client have been properly considered.

Suppose You Analyze a Particular Deal and It Appears That