Real Estate Investment Economics: Techniques for Investment Appraisal

This report discusses investment appraisal techniques for real estate investment economics, focusing on net present value and its role in investment decision-making. It includes case studies and explores economic factors affecting investment decisions. The report also covers the impact of inflation on rent expenses. References are provided for further reading.

REAL ESTATE
INVESTMENT
ECONOMICS
Table of Contents

INTRODUCTION......................................................................................................................................3
MAIN BODY..............................................................................................................................................3
Question 1..............................................................................................................................................3
Question 2..............................................................................................................................................4
Question 3..............................................................................................................................................6
CONCLUSION...........................................................................................................................................6
REFERENCES...........................................................................................................................................7

INTRODUCTION
Investment decision-making is demonstrated as the decision is taken about the
investment. This report will discuss the investment appraisal technique that can be used by the
investor while making the investment decision.
MAIN BODY
Question 1
Building 1 Building 2 Building 3
Initial investment 8000000 12000000 11000000
Commercial rent 720000 (60 * 12
* 1000)
828000 (46 *
12 * 1500)
864000 (36 * 12
* 2000)
Renovation charges 21600 (720000 *
3%)
24840
(828000 *
3%)
25920 (864000 *
3%)
Tax 160000
(8000000 * 2%)
240000
(12000000 *
2%)
220000
(11000000 * 2%)
Total cost 8901600 13092840 12109920
Net present value:
Cost / Discounted rate
Building 1= 8901600 / 6%
= 148360000
Building 2 = 13092840 / 6%
= 218214000
Building 3= 12109920 / 6%

= 201832000
Net present value is a monetary term demonstrated as the need advantage can be gained
against investment in the project. The role of the net present value is to demonstrate as the
potential level of advantage that can be gained against making the investment decision-making.
In the current circumstances there is not any information about the revenue entertain against
making investment in the project (Diana and et.al., 2019). In such a situation the valuation of the
net present value is done based on the outflow or the investment that is made over the project.
The net present value formula in normal situation is the difference between the original
investment money and the overall advantage or inflow at the present value is gained against the
investment made. The building 1 is allocating the total net present value perpetuity is 148360000
and for the building 2 the value is 218214000 and in case of building 3 the value is 201832000.
This value only comprises with the outflow entertain against the investment is made. In case of
the net present value evaluation is monitored on the basis of the outflow the least the value is
selected as a favorable proposal option against the investment is made. Building 1 is generating
the least value of net present value that demonstrate about the financial feasibility of the
respective investment decision-making. The choice of this building would allow the investor to
save necessary finances against investing in the project.
Question 2
Building 1 Building 2 Building 3
Initial investment 8000000 12000000 11000000
Commercial rent 720000 (60 * 12
* 1000)
828000 (46 *
12 * 1500)
864000 (36 * 12
* 2000)
Renovation charges 21600 (720000 *
3%)
24840
(828000 *
3%)
25920 (864000 *
3%)
Tax 160000
(8000000 * 2%)
240000
(12000000 *
2%)
220000
(11000000 * 2%)

Interest 266000
(8000000 * 50%
* 6.65%)
319200
(12000000 *
5.32% * 50%)
215600
(11000000 *
50% * 3.92%)
Total cost 9167600 13412040 12325520
Net present value:
Cost / Discounted rate
Building 1= 9167600 / 6%
= 152793333
Building 2 = 13412040 / 6%
= 223534000
Building 3= 12325520 / 6%
= 205425333
The above stated statement precisely stated the fact that building 1 contain the least
amount of the net present value against the investment is made in the project. The concept of the
net present value is such that only such investment proposal should be accepted that can
allocated the maximum number of financial advantage gain against the investment is made in the
project. In context to the building number 1 the total cost of the project is least as compare to
other investment choices. The investment is more favorable only if the proposal entertain limited
level of expenditure and cost. Building 1 total investment is far less than the other two
investment choices available. If this option is selected that would allow the investor to maximize
its financial wealth. The current investment appraisal decision-making is based on the
investment made in the project (Gaspars-Wieloch, 2019). This has been assumed that there is not
any revenue is getting against the investment is made in the proposal or possible choice
available. Hence, if the investment is made in the respective proposal this would allow the
stakeholder to gain the best possible advantage against the investment is made in the project. The
advantage of this technique is that it clearly demonstrate about the value that would be gained as
net inflow and outflow against the investment is made in the project. In this option the interest is

also included over the loan is taken in against to procure the iunve6sde building. The value of
the interest will also be considered as the net outflow company is facing in against of making the
investment in the project.
Question 3
Economic factor of business environment clearly state the fact that inflation among the
core challenge the economy face. Inflation play role in increasing the expenses by decreasing the
value of the currency (Heydt, 2017). The result of inflation is that every year rent expense also
increases. This significantly influence over the cost of each month related to the rent
expenditure. The value of rent is also increased such like other expenses increases every
financial year. The effect of rent would not be measure over the investment decision is made in
the project. The effect of the increased rent expense would not be massive when it comes to
influence the investment decision-making in the project. This is an obvious fact that in
comparison to the value of building the amount of rent is not significant so it won't progressively
affect the investment decision-making of the investor (Woo and et.al., 2019). The increasing rent
every year will not be a significant element or factor that significantly would affect the
investment decision making. This is assumed that even if the rent is increasing every year due to
the factors like inflation there will not be any significant impact put over the investment decision
making.
CONCLUSION
Net present value is a technique that is the net advantage investor gain against making
the investment decision-making. In the above stated description the investment decision-making
of Building 1 in all the cases are based on the concept of net present value method. The least the
expense value would be preferred as the bet possible choice for the investment.

REFERENCES
Books and Journal
Diana, S. R. and et.al., 2019. Economic assesstment of satellite remote sensing data in
Indonesia: a net present value approach. International Journal of Economics and
Financial Issues, 9(1). p.140.
Gaspars-Wieloch, H., 2019. Project net present value estimation under uncertainty. Central
European Journal of Operations Research, 27(1). pp.179-197.
Heydt, G. T., 2017. The probabilistic evaluation of Net Present value of electric power
distribution systems based on the Kaldor–Hicks compensation principle. IEEE
Transactions on Power Systems, 33(4). pp.4488-4495.
Woo, J. and et.al., 2019. Developing an improved risk-adjusted net present value technology
valuation model for the biopharmaceutical industry. Journal of Open Innovation:
Technology, Market, and Complexity, 5(3). p.45.