Sunday, August 25, 2019

Real Estate Investment Analysis (data provided) Case Study

Real Estate Investment Analysis (data provided) - Case Study Example Also the rate at of absorption is very high. Meaning if a new investor comes into the market, more tenants are likely to shift to the new property. Finally, most of the occupants are employed, thus paying rent won’t be an issue. Discounted cash flow (DCF) is used in valuing projects, assets or investments by taking into account the time value of money. The concept of time value for money states that a shilling today is worth than a shilling tomorrow. As a result investors would rather get cash now rather than wait. The market is dynamic and factors such as inflation are unpredictable. The appropriate rate of discounting is known. This is not the case as the rate can be determined using methods such as Capital asset pricing model (CAPM) and the weighted average cost of capital (WACC). Secondly, the cash flow forecast was created based on the assumptions made. In the cash flow, projected income is subtracted from expenditure and taxes. The cash flow only considers cash. Depreciation and interest expense is non-cash item thus excluded from the cash flow. Income tax is charged against the taxable income. Therefore, in computing income tax, depreciation and interest were subtracted from the NOI to get the taxable income. Interest is computed using the amortization schedule as 8% on the beginning balance of loan in each year. NPV is an appraisal method that calculates returns on investments by discounting future cash flows and deducting them from the initial cost of the investment (Brigham & Houston 2009, p 338). It is a modern method in capital budgeting and it takes into account the time value for money. It also uses cash flows and not profits in assessing the viability of an investment. Cash flows are forecasted first, initial cost of investment determined and a required rate of return is given. The rate of return is the return that investors expect from their investments. The initial capital outlay is based on the value of assets. The value is 1.5M. This

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