Multi-year Business Expenses Analysis

This assignment requires a comprehensive analysis of multi-year business expense data, spanning from 2016 to 2021. It involves calculating the annual sum of expenses for six categories: utilities, insurance, supplies, advertising, maintenance & repairs, and property taxes. You are also tasked with determining the net cash flow each year. Using an annual discount rate of 7%, you need to calculate the discounted value of these cash flows and their present value.

DCF MODEL DEVELOPMENT & CASE STUDY
VALUATION AND PROFESSIONAL REPORT

EXECUTIVE SUMMARY
Real estate industry contribute a lot to the GDP of Australia. This is the reason due to which now
government of Australia is laying down more emphasis on construction sector then mining
sector. In past couple of years price of properties increase at fast rate in Australia. Along with
this rent amount also increase which reflect that in upcoming time period further elevation will
be observed in rent property. This condition to some extent is not good for people becauase they
have to pay more for purchasing homes and paying rent to people. However, real estate firms
beenfit a lot from price plunge in proerties.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
Planning and designing of valuation of real estate property........................................................1
Application of scholarly practice through disciplinary and inter disciplinary knowledge to
innovate solution of problem.......................................................................................................2
Ethical implications of property decision making.......................................................................2
Strength and weakness of discounted cash flow method.............................................................3
Market analysis methods and their applications..........................................................................4
Assessment 2...................................................................................................................................5
Industry trends.................................................................................................................................5
Industry threat and opportunity...................................................................................................5
Industry analysis and trends.........................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8
APPENDIX....................................................................................................................................10

INTRODUCTION
Real estate is one of the main industry in Australia as it is growing consistently in the
nation. In current report, discounted cash flow valuation of property is done and its value is
identified. Discounted cash flow model is atached in appendix. In first part of the report planning
and designing of valuation of real estate property is done. Apart from this, detail discussion is
carried out on discounted cash flow model and its merits and demerits are discussed in detail. At
end of the report, industry analysis is done and on that basis threats and opportuity are identified.
Planning and designing of valuation of real estate property
Investment propety valuation is the one of the important tool that is used to measure viability of
the project. If any business firm have two alternatives then it can select specific one of them and
which one will be selected is decided on the basis of valuation approach. Under real estate
valuation first of all cash flows are estimated. Under this firm can consider previous time period
figures and on that basis can decide cash flows or it can estimate number of bookings that will be
observed in the business for flates in real estate property. It depends on the business firm that
which of mentioned approach it select in its business to determine cash flows for valuation
model (Warren-Myers, 2012). There are both positive and negative sides of these cash flow
approaches in the business. If past records are taken in to account then it become very easy to
make estimation of cash flows and this is positive side of this approach. Opposite to this, in case
past and present conditions changed at fast rate then in that situation this method can prove
wrong for the company. On other hand, there is another approach under which assumption is
made about number of bookings that will happened within specific time period. Assumption may
prove wrong either over assumption can be made about over booking or under booking by
considering predicted bookings. Hence, it is very important to ensure that asumptions almost
accurately made while developing valuation model. In current report it is assumed that in first
year rental income will be equal to 2346100. On the basis of consideration of inflation rates for
future time period cash flows are estimated. Inflation rate is considerd because it reflect rate at
which price changed on yearly basis. On yearly basis rent amount is increased due to increase in
inflation rate. Hence, by considering this point on yearly basis inflation rate is enhanced
(Bouchouicha and Ftiti, 2012). In alignment to income expenses also increased in business and
due to this reason inflation rate is again considereed for estimating cash outflow amount in
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property valuation model. It can be said that there are lots of factors that one need to take in to
consideration while developing real estate property valuation model.
As per plan in the model first of all estimation is made about rental income and then
expenses are determined. From revenue amount expenses amount is subtracted to compute net
revenue amount. Finally, these cash flows that are related to different time period are summed up
in order to identify overall net present value of the project. By following this apperoach entire
valuation model is prepared.
Application of scholarly practice through disciplinary and inter disciplinary knowledge to
innovate solution of problem
There are number of issues that are faced in respect to valuation model. One of these
issues is determination of cash flow amount. As stated above it is just estimation of cash flows as
there are two apperoaches either one can take values from past projects or individual can make
estimation about number of bookings that will be received from people (Wang and Wolverton,
2012). It is very tough task to make accurate estimation on the basis of both approaches. Steps
need to be taken in order to ensure that in accurate manner estimation will be made about rental
amount. In this regard firm can estimate mimum number of people that can take property on rent
in specific time period. This approach will ensure that either actual valuation of property is high
or equal to value that is computed by valuation method. Thus, there will be reliability of entire
analysis that is carried out on valuation of property. In other words, it can be said that by
following this method solution of problem can be identified. It can be said that there is huge
significence of the valuation approach for the business firms because by using same value of
property in the market is accessed by considering cash inflow amount and cash outflow items.
Property and valuation theory
In valuation theory there are four points that are listed below.
 Value of any property in current time period depends on discounted value of future
benefits. This means that if any one wants to identify real value of an asset then in that
case it need to identify future benefits in terms of money and then discount it back to
identify real value of property.
 It must be assumed that value of any property is proportional to its expected utility and its
nature. Thus, it can be said that features of any property must also be taken in to account
while valuation of property.
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 Price of property or its valuation depends on market transactions. Buyers and sellers are
one of the important entities that play crucial role in construction of house prices. If any
of them show less interest in property then its value erode.
 Price is assumed in equilibrium when there will be balance between demand and supply.
Usually, equilibrium valuation of property is not observed in the market. Hence, investors
according to best option must make decision.
Ethical implications of property decision making
There are ethical implications of property decision making as it can be observed that
many times business firms make heavy investment on specific project that are related to
application of specific legislation. It is necessary to ensure that while making property related
decisions none of wrong factors are taken in to consideration (Babawale and Oyalowo, 2011). It
can be observed that many times business firms decided to develop property on the land which is
already dispute because from the land they can earn good amount of profit in business. But such
kind of practice proved very costly to the business firm. Hence, it is very important for the
business firms to ensure that they are following ethics in their business. It can be said that ethics
and property decision making are interrelated to each other. There must be separate team of
managers which will keep close eye on all sort of operations and will ensure that all sort of ethica
are folloed in the business.
Strength and weakness of discounted cash flow method
Like every method discounted cash flow method also have some advantage and
disadvantage. In present sectio of the reprot several merits and demerits are explained below.
Advantages of discounted cash flow model
Major advantage of cash flow model is that either it can be used to do valuation of entire
company or its specific business. This is line of big advantage of the discounted cash flow
model. The other main advantage of discounted cash flow model is that it is easy to apply
mentioned method on data set (Altshuler and Magni, 2012). It is certain that it is one of major
merit of the discounted cash flow model. Third main advantage of using discounted cash flow
model is that it can be used by varied sort of entities like shareholders and research analysts. This
is because by using this approach shareholders comes to know about real value of equity that
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they hold in their business. On other hand, it can be said that research analysts can also use this
approach in making their day to day investment decisions.
Disadvantage of discounted cash flow model
There are some of weak points of discounted cash flow model as it can be observed that
in the disocunted cash flow model usually inputs are entered and then model compute value of
an asset. If wrong input will be entered then in that case big change in value of asset can be
observed. This is not good and it can be said that asset that look lucrative in single sight may be
worst performer if value of model get changed. Success of discounte cash flow model depends
on accuracy of assumptions and calculated value. It can be observed that in case wrong
estimation will be made about cash inflow amount model will compute wrong value and it can be
said that it is one of major limitation of discounted cash flow valuation model.
In order to compute net cash value simply from cash inflow amount expenses are
subtracted and by doing so net cash flow amount is computed. This is the treatment in the
discounted cash flow model that is usually followed for computing net cash flow amount.
Discount value is computed by using weighted average cost of capital (Weis and et.al., 2014).
Under this approach simply first of all cost of equity is computed and for this CAPM model is
used. CAPM refers to capital asset pricing model which is used to identify required rate of return
on investment amount. Under this formula risk free rate of return on treasury bill is determined
along with market return. By considering these factors cost of equity is calculated. Then
enterprise value is calculated and under this cost of equity and debt are taken in to consideration.
Weight is given to debt and equity in the capital structure and in this way weighted average cost
of capital is computed. It is the entire treatment that is considered for computing cost of capital
associated with project.
In current report it is assumed that 7% will be firm discount rate because there is no
specific parameter on which basis of which discount rate can be determined. 7% is usuaolly
charged on bank loan and due to this reason 7% is taken as discount rate in the business. Hence,
such a long process that is explained above is not taken in to consideration.
Terminal rate reflect the values that will be taken in to consideration post forthcoming
time period. It is clear fact that for long term accurate prediction can not be made and due to this
reason terminal value is taken in to consideration (Bozorgi, 2015). Terminal value is final value
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that is computed and consdiered for each year post 5 year duration. It is treatment of terminal
value.
Market analysis methods and their applications
There are number of market analysis methods that can be used and applied in business.
Some of market analysis method and their application is explained below.
Market segementation, targeting and position approach
Market segmentation, targeting and positioning is the one of the important approach that
is used by most of business firms. Under market segmentation method entire area or people are
divided in to several parts and from them relevant customers are identified. These are the people
to whom product can be sold and demand of the product is high. Positioning strategy is prepared
for the business product and under this specific image of firm product is created among
customers. Hence, it can be said that by using this approach deeply analysis of market happened
and due to this reason there is huge importance of segementation, targeting and position strategy
for the business firms.
PESTEL analysis
PESTEL analysis is another important method of evaluating market. P stands for political
environment which reflect political parties, their ideolohgy and steps they taken to boost
business. On basis of this analysis it is identified whether market will grow or will observe
slugguish growth (Key, 2010). On other hand, there is another component of business
environment which is economic environment. This factor reflect whether there is availability of
sufficient amount of finance in the business and whether economic environment support business
firm. Thus, it can be said that both political and economic environment factor have due
importance for the business firm. Social environment also affect profitability of firm as people if
have saving behaviour then in situation of unstable economic environment sales of the firm
products may declined. Thus, in this way economic environment help in analyzing market in
better manner. Technological environment reflect challenges that firm may face in its business
due to advancement of technology (Donner, 2010). Thus, in this way technology environment
help in analysis of market. Legal environment heavily affected real estate market and due to this
reason it is very important to follow all these rules and regulations tightly in the business. Thus,
it can be said that PESTEL analysis is also one of the most important approach that is used to do
market analysis.
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Assessment 2
Income valuation Detailed analysis of cash flow: Cash flow in year 1 is 2346100 and then it is increasing
at rate of 2% on yearly basis. This is because inflation rate in the nation increase at rate of
2% on yearly basis. It is assumed that by considering inflation rate each year inflation
rate will increase by 2%. Rent amount across year and discount rate, market rent as well as passing rent: Rent
amount for year 1 to 5 will be 2346100,2393022,2440882 and 253494. Discount rate will
be 7% because on average if loan is taken for business interest of 7% is charged by
banks. At this rate, all cash flows are discounted while preparing valuation model. Market
rent in Sydeney for single bedroom is 645 AUD week which means monethly amount
become 2580 AUD (Duke, 2017). On property rent amount charged is 2443 AUD which
means slightly below market rent on per person is charged on monthly basis. Perceived quality of lease in respect to current market expectations: According to
market expectations lease is provided to people and under this there will be single
bedroom and kitchen where all releavnt facilities will be available. Thus, perceived
quality is according to market expectations. Comparison of market rent and passed rent and rationale for adjustment: There is no
large difference between market rent and passed rent as current rent amount charged on
tenant is 2443 AUD and market rate is 2580 AUD per month. This monthly rate is
adjusted at 2% inflation rate because it on yearly basis grow at 2%. Variance analysis of expenditures: Expenditures are increasing consistently as it can be
observed that expenses are increasing at 2%. It can be observed that both income and
expenses are increasing at same rate on yearly basis because both goes on same
proportion on yearly basis. Hence, due to this reason both are increased at same rate. Anticipated changes in outgoings: In maintinance and repair expenses and property tax
outgoing amount may change as property goes old expenditure on same keeps on
increasing consistently. Some times with passage of time these expenses elevate at fast
rate. Hence, changes are anticipated in maintinance and repair expenses and property tax.
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 Source of outgoing information: Sources of outgoing information are varied websites
where information on rent amount charged by relevant firms is easily available.
Expenses of management fee and other expenses are assumed. Lease expiry profile: Lease will be expired after 10 years and thereafter either contract
will be expired or it will be renewed. Prospects of vacant scpace and likely rent: In case someone leave rented property then
new individuals will be kept as tenant and likely rent amount will be 2%+ on previous
year rent amount as shown by valuation model.
Industry trends
Industry threat and opportunity
Like every industry there are also threats and opportunities that are associaetd with the
industry. It can be observed that in real estate domain there are number of oportunities. One of
main opportunity that can be seen in an industry is increase in revenue amount. Rveenue can be
increased at fast rate in the mentioned industry. Most of people are earning good amount of
rental income and due to this reason such kind of people are giving their homes on rent. It can be
observd that rent amount of loan increased from 25% to 30% which can be considerd good by
the people. Earning opportunitiy of earning good amount of rent is very high in Australia. In past
couple of years propoerty prices also increase at very fast rate. With decline in interest rates
sudden increase is observed in price of properties. This is goodf signal for those who have lots of
properties as relevant people by selling their asset in the market can earn good amount of
revenue in the business. It is expected that in upcoming time period also same trend will remain
in existance. Thus, there are ample opportunities that existed in the market (Pfnür and Armonat,
2013). There is also heavy risk that is associated with real estate sector. One of these risks is that
technology is changing at fast rate across the globe. Due to change in technology those firms that
are not capable to update their technology base may face heavy loss in the business. It is well
known fact that price of homes is elevating regulalrly. It can be said that real estate firms needs
to update their technology base to large extent because by doing so they can give tough
competition to rivals. Government is also focusing on preparing policies and procedures that
support real estate firm to great extent. This is because if real estate firms will grow they will
provide employment opportunity to large number of people. This will bring economy of the
nation on growth track.
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Industry analysis and trends
In Sydney residential homes prices increase by 19.9% in year 2015. In current time
period government of Australia is focuing on construction industry then mining domain. On
average basis house price in Sydney is 789900 which is very high. This reflects that property
price is skyrocketing at rapid rate and it become difficult for common person to make purchase
of home. Mining sector is already performing well and in order to ensure that construction
industr will also give expected performance government of Australia give due emphasis on
construction industry (Demir and Bostanci, 2010). It can be said that conditiion is critical in
Australia and then also price of houses is increasing consistently.
Not only house prices but rent amount also increased at fast rate in the mentioned nation.
This reflect thatt here ae ample oportunities for the business firms and they can capitalize
opportunity by making best use of resources in business and by keeping eye on busines
environment. Despite increase in price demand of property increases consistently in Australia.
This further fuel pressure on people as those whose income level is medium find themselves
unable to make purchase of reale state property (Chandler, 2016). Cash rate decline also motivate
people to make more investment in real estate as it can be observed that cash rate percentage is
now 2% which is very low. After great financial crisis time period first time cash rate become
low to such a level. This would promote more and more people to develop their house and give
same on rent so that good amount can be earned. With passage of time period rent amount is
increasing consistently due to which people are earnng good amount of earning from their real
estate property.
Overseas people are also making heavy investment in real estate properties as now
Sydeny become equivalent to New Yorkm and other cities. In order to earn good amount of rent
amount and to sell property at high level of capital gain foreign investors are consistently making
very huge investmemt in real estate property of Australia (Pirounakis, 2013). Hence, it can be
said that there is very high positive outlook of business firms and people in respect to real estate
sector of Australia. Due to overvaluation of propoerty it is assumed that sub prime condition
may arise in mentioned nation after USA. However, this thinking proved wrong because in
Australia there are already very tough lending regulations. Thus, it can be said that there are lots
of opportunties that are for people in Australia to make money from real estate.
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CONCLUSION
On the basis of above discussion it is concluided that real estate is one of the fastest
growing industry in the nation. In past couple of years real estate property values rise at very fast
rate and rent amount also increase at fast rate. Due to this reason property owners are earning
good amount of reuturn in their business. It is expected that in upcoming time period also
mentioned industry will grow consistently in industry.
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REFERENCES
Books and Journals
Altshuler, D. and Magni, C.A., 2012. Why IRR is not the rate of return for your investment:
Introducing AIRR to the real estate community. Journal of Real Estate Portfolio
Management. 18(2). pp.219-230.
Babawale, G.K. and Oyalowo, B.A., 2011. Incorporating sustainability into real estate valuation:
The perception of Nigerian valuers. Journal of Sustainable Development. 4(4). p.236.
Bouchouicha, R. and Ftiti, Z., 2012. Real estate markets and the macroeconomy: A dynamic
coherence framework. Economic Modelling. 29(5). pp.1820-1829.
Bozorgi, A., 2015. Integrating value and uncertainty in the energy retrofit analysis in real estate
investment—next generation of energy efficiency assessment tools. Energy Efficiency. 8(5).
pp.1015-1034.
Demir, H. and Bostanci, B., 2010. Decision-support analysis for risk management. African
Journal of Business Management. 4(8). p.1586.
Donner, S.M., 2010. Risk management in the aftermath of Lehmann Brothers–Results from a
survey among German and international real estate investors. Journal of Property
Research. 27(1). pp.19-38.
Key, T., 2010. The Future of Real Estate Education (pp. 262-77). Oxford: Wiley-Blackwell.
Pfnür, A. and Armonat, S., 2013. Modelling uncertain operational cash flows of real estate
investments using simulations of stochastic processes. Journal of Property Investment &
Finance. 31(5). pp.481-501.
Pirounakis, N.G., 2013. Real Estate Economics: A Point-to-point Handbook. Routledge.
Wang, K. and Wolverton, M.L. eds., 2012. Real estate valuation theory (Vol. 8). Springer
Science & Business Media.
Warren-Myers, G., 2012. The value of sustainability in real estate: a review from a valuation
perspective. Journal of Property Investment & Finance. 30(2). pp.115-144.
Weis, C. and et.al., 2014. Labeling of cancer cells with magnetic nanoparticles for magnetic
resonance imaging. Magnetic resonance in medicine. 71(5). pp.1896-1905.
Online
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Chandler, T., 2016. [Online]. Spotting major threats that lie ahead for Australian Housing
market. Available through:< https://buyersagent-sydney.com.au/threats-australian-housing-
market/>. [Accessed on 16th Octomber 2017].
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APPENDIX
Year 1 Year 2 Year 3 Year 4 Year 5
Terminal
year
Acquisition cost
100000
0
Revenue
234610
0
239302
2
244088
2
248970
0
253949
4
2590283.97
2
Less: Expenses
Management Fee 112700 114954
117253.
1
119598.
1
121990.
1
124429.906
5
Salary Expense 305000 311100 317322
323668.
4
330141.
8 336744.645
Utilities 107000 109140
111322.
8
113549.
3
115820.
2
118136.645
9
Insurance 45800 46716
47650.3
2
48603.3
3
49575.3
9
50566.9007
9
Supplies 30800 31416
32044.3
2
32685.2
1
33338.9
1
34005.6887
4
Advertising 44200 45084
45985.6
8
46905.3
9 47843.5 48800.3715
Maintenance & repairs 299400 305388
311495.
8
317725.
7
324080.
2
330561.792
5
Property Taxes 200000 204000 208080
212241.
6
216486.
4
220816.160
6
Sum of expenses
114490
0
116779
8
119115
4
121497
7
123927
7
1264062.11
2
Net cash flow
220120
0
122522
4
124972
8
127472
3
130021
8
1326221.86
1
Annual discount rate 7%
Discounted value of cash
flows
205719
6
107015
8
102015
1
972480.
1
927037.
1 883717.624
Present value of cash flows
693074
0
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