Financial Analysis and Property Investment Decision Making Report

This report provides a comprehensive financial analysis of a property investment decision. It begins with a client's requirements for a home, including space for a garden, parking, and a private room for recording YouTube videos. The report identifies a suitable property in Barking and Dagenham, analyzing its features and associated costs. A detailed analysis of the London real estate market is presented, including price trends and forecasts. A spreadsheet model is developed to assess the financial viability of the investment, calculating disposable income, expenses, and net present value (NPV). The analysis considers both a static scenario and a scenario with increasing salaries and expenses. The report concludes with a consultancy report summarizing the findings and offering recommendations based on financial and non-financial analyses, including the impact of inflation and potential rental income.

ACCOUNTING
FOR
DECISION MAKING

Table of Contents
1. Decision on property....................................................................................................................3
2. Detailed analysis of Real State market in London.......................................................................4
3. Spreadsheet model for the decision.............................................................................................4
4. Consultancy report.......................................................................................................................6
References......................................................................................................................................10

1. Decision on property
Client requires a home with enough space for garden and parking space. Additional to this David
requires private room to record YouTube videos. Overall, it would be required one bedroom,
kitchen, bathroom, garden space, parking space, guest hall and one private room. In external
requirement, client needs good transport links to Central London and a car to travel to their
office few days a week.
Below is the shortlisted property which best suited with client’s requirement:
The best suited place to purchase housing property is Barking and Dagenham with an average
price of £300,000. From here it will take only 29 minutes with car to reach Central London as it
is only 13 miles far away from central city. All the internal demand of client’s such as one
bedroom, attach toilet, modular kitchen, one private room, garden and parking space can be
fulfilled after investing £302,445 overall money in Barking and Dagenham. The average price of
property other than this started with £325,000. Additional to this; client will also get facility of
excellent transport links into Central London with Cross rail to Chadwell Heath and the over
ground extension to Barking Riverside (Right move, 2020).
Other details:
Kitchen size: 12’9 × 12’ double glazed window
Lounge: 12’9 × 12’
Entrance: Front floor door in, radiator, stairs to first floor
Bedroom: 8.2 × 4’4 obscure double glazed window
Parking: On road permitted
Rear Garden: Paved patio area with small path, remainder laid to lawn, shrubs and flowerbeds
either side with shed to rear.
Loan: Available at monthly repayments of £1,298; annual interest @2.4% and 25 years
repayment period and at 10% down payment (Right move, 2020).

2. Detailed analysis of Real State market in London
House prices in London will end the year with an overall increase of 2.5%, according to a study
by Hamptons International. In its latest housing market report the estate agent chain expects
prices in the UK to rise 2% in 2020, up from 0.9% in 2019. Wales (3%) and London (2.5%) will
see the strongest house price growth this year (London house prices, 2020).
“London’s market rebounded quickly after the easing of lockdown, buoyed by pent-up demand
over the last few years and an increase in the number of people bringing forward a decision to
move,” Hamptons said in the study. “This is also the region where buyers enjoy the greatest
benefit from the stamp duty holiday.”
As a result, Hamptons expects house prices in London will rise 2.5% in 2020, offsetting the
decline of -0.4% in 2019. However, the number of homes coming onto the market for sale in the
capital is climbing. In August there were 78% more new instructions than at the same time last
year (London house prices, 2020).
Hamptons forecasts that this may contribute to a 1% house price fall in 2021, when combined
with “existing affordability barriers, lack of international buyers, the end of the stamp duty
holiday and an increase in the number of households seeking to relocate elsewhere”.
The report also says that the economy recovers, and it is expected that London’s market to return
to its longer-term cycle. Since prices have risen by 53% in the city over the last ten years
compared with an average of 10% in the north, it is expected that London will underperform
northern regions. House prices in London will rise 1.5% in 2022 and 3% in 2023, putting four-
year growth at 5.5%.”
Based on above report; the couple will try to purchase new home before 2022 to avoid the price
rise of 1.5%. At this time, market is facing recession and hence price of real estate property is
also low. Therefore, it is the right time to purchase property at low price (London house prices,
2020).

3. Spreadsheet model for the decision
Disposable income:
David:
Annual salary £50,000
Bonus £15,000
Assumed average income from
YouTube annually (from next
year)
£15,000
Anna:
Annual salary £50,000
Total cash inflows year 1 £115,000
Less: Expense@65% £74,750
Net Income before tax £40,250
Less: Income tax@25% £10,063
Net Income after tax £30,188
Total cash inflows year 1
onwards
£130,000
Less: Expense@65% £84,500
Net Income before tax £45,500
Less: Income tax@25% £11,375
Net Income after tax £34,125
Expenses: It is assumed that couple is capable enough to save cost and doesn’t waste money on
unnecessary events. Hence, average annual cost carries 65% of total cash inflows.
Note: In cash inflows; income and expenses are stable which in practical not possible due the
impact of inflation. But it is assumed that incomes and expenses will rise with same proportion
result in same profit (Abor, 2017).
Initial Investment -£325,000
Cash Inflows
(Years)
Cash
Inflows
Discounting
factor
@10%
Net present
cash inflows
Net Present
value
1 £30,188 0.90909090
9
£27,443.18 -£297,556.82
2 £34,125 0.82644628
1
£28,202.48 -£269,354.34
3 £34,125 0.75131480
1
£25,638.62 -£243,715.72
4 £34,125 0.68301345 £23,307.83 -£220,407.89

5
5 £34,125 0.62092132
3
£21,188.94 -£199,218.95
6 £34,125 0.56447393 £19,262.67 -£179,956.27
7 £34,125 0.51315811
8
£17,511.52 -£162,444.75
8 £34,125 0.46650738 £15,919.56 -£146,525.19
9 £34,125 0.42409761
8
£14,472.33 -£132,052.86
10 £34,125 0.38554328
9
£13,156.66 -£118,896.19
The above results show that net present value is negative by £118,896.19. This indicates that
price of the house has not been covered by couple in 10 years of period and it will take more
time. To get positive net present value; it is necessary to either increase net cash inflows or
reduce expenses (Abor, 2017).
4. Consultancy report
Executive Summary
This report is based on the analysis of investment decision based on financial and non-financial
analyses. The decision has to be made about whether to buy or rent house. The report is ended
with recommendation in the form of advice to the client with explanation of reason behind
particular decision.
Financial Analyses
Financial analysis is the method of evaluating organizations, commitments, spending plans and
other money-related exchanges to determine their presentation and appropriateness. Monetary
analysis is routinely used to determine whether an item is stable, soluble, mobile, or productive
enough to warrant a financial firm.
Financial analysis is used to evaluate liquidity models, set a budgeting approach, develop
slow long-term plans for the movement of businesses, and identify profitable businesses or
organizations. This is done by combining numbers and information relating to money. A budget
expert analyzes an organization's tax records: the payroll call, accounting report, and revenue.
Money analysis can be conducted for both business accounts and business money. One of the
best known methods for analyzing financial information is to extract quotes from information in
tax reports to think whether against certain groups or against the harmful performance of
financial information own organization (Abernathy and et.al., 2019).
For calculating disposable income; it is assumed that couple pays taxes at the rate of 25%.
Couple will get stable cash inflows without any increment over the year and from YouTube also

David will receive fixed annual income amount £15,000 from year 2 onwards without any
increase or decrease in the income. Expenses have also been fixed with 65% portion of total
income received by couple. Cash inflows have been calculated based on discounting factors of
10% each year. This results into negative present value of whole investment. But this analysis
has one problem that is no increment added to salary and expenses. It is obvious that salary will
increase due to effect of inflation and with the same effect, expenses will also rise. Hence, the
updated cash inflows with the adjustment in cash inflows has been shown below (Note: it is
assumed that salary will increase at the rate of 12% every year):
Disposable
income:
David: Year 1 2 3 4 5 6 7 8 9 10
Annual salary £50,000 £56,000 £62,720 £70,246 £78,676 £88,117 £98,691 £110,53
4
£123,79
8
£138,65
4
Bonus £15,000 £15,000 £15,000 £15,000 £15,000 £15,000 £15,000 £15,000 £15,000 £15,000
Assumed
average
income from
YouTube
annually
(from next
year)
£15,000 £15,000 £15,000 £15,000 £15,000 £15,000 £15,000 £15,000 £15,000 £15,000
Anna:
Annual salary £50,000 £56,000 £62,720 £70,246 £78,676 £88,117 £98,691 £110,53
4
£123,79
8
£138,65
4
Total cash
inflows year 1
£115,000 £142,00
0
£155,44
0
£170,49
3
£187,35
2
£206,23
4
£227,38
2
£251,06
8
£277,59
6
£307,30
8
Less:
Expense@65
%
£74,750 £92,300 £101,03
6
£110,82
0
£121,77
9
£134,05
2
£147,79
8
£163,19
4
£180,43
8
£199,75
0
Net Income
before tax
£40,250 £49,700 £54,404 £59,672 £65,573 £72,182 £79,584 £87,874 £97,159 £107,55
8
Less: Income
tax@25%
£10,063 £12,425 £13,601 £14,918 £16,393 £18,045 £19,896 £21,968 £24,290 £26,889
Net Income
after tax
£30,188 £37,275 £40,803 £44,754 £49,180 £54,136 £59,688 £65,905 £72,869 £80,668
Net Present Value: Net present value (NPV) is the difference between the current estimate of
cash inflows and the current estimate of cash flows rising over an indefinite period. NPV is used
in capital planning and profitability which is intended to examine the productivity of a strong or
expanded company (Museloo and Abartavi, 2017).
Positive net present value indicates that the increased income generated by a business or
company - in standard dollars - is higher than expected, as in current dollars. It is assumed that a
company with a positive NPV will be productive and profitability with a negative NPV will lead
to a total deficit. This idea is the reason for the net present value rule, which states that single
companies with advanced NPV features should be considered (Imhanzenobe and Adeyemi,
2020).
It is now worth more than a similar amount of money at a later date due to the ever-increasing
uptick and selective profit-making income that can be made during the transition period. In total,
a dollar purchased later will not be as large as one purchased in the present. The decay rate
component of an NPV equation is one approach to its representation.

An investor may be happy to stand for a year to get an additional 5%, but that may not be
appropriate for all financial experts. In this case, the 5% floating rate is the discount according to
the financial expert. If a financial expert realized that he could get an 8% discount on moderate
defense profitability in the following year, he would not delay a 5% allowance. For this scenario,
the speculator's benchmark rate is 8% (Paquin, Gauthier and Morin, 2016).
An organization can determine the level of recognition by using a standard product from a
different business with a relative level of risk or cost of money expected to fund the campaign.
For example, an organization may refrain from a trusted commitment to return 10% annually on
the possibility that it does not cost 12% to return work or a selective campaign may 14% return
annually (Paquin, Gauthier and Morin, 2016).
Below is the updated Net Present Value of whole investment:
Initial
Investment
-£325,000
Cash Inflows
(Years)
Discounting
factor @10%
Net present
cash inflows
Net Present
value
1 £30,188 0.909090909 £27,443.18 -£297,556.82
2 £37,275 0.826446281 £30,805.79 -£266,751.03
3 £40,803 0.751314801 £30,655.90 -£236,095.14
4 £44,754 0.683013455 £30,567.83 -£205,527.31
5 £49,180 0.620921323 £30,536.84 -£174,990.47
6 £54,136 0.56447393 £30,558.63 -£144,431.84
7 £59,688 0.513158118 £30,629.30 -£113,802.54
8 £65,905 0.46650738 £30,745.35 -£83,057.19
9 £72,869 0.424097618 £30,903.58 -£52,153.61
10 £80,668 0.385543289 £31,101.13 -£21,052.48
The result shows that even after getting increment in salary; the present value is still negative.
This indicates the value of house can’t be recoverable in ten years.
If couple go for selling property after 5 years (assuming depreciation @ 20%) than they
requires to sell the property above £162,500 to avoid loss on the sale of property. If they rented
the property than regular income of £2,800 will be received (Hunjra, Bakari and Batool, 2018).
On the other hand; if couple go for renting the property in Central London itself by paying
monthly rent of £2,500 for one bedroom apartment; then the net present value would be as
follows (it is assumed that rent will increase @10% every year):
Cash Inflows (Years)
Cash
Inflows Less: Rent
Net
cash
Discounting
factor @10%
Net present
cash inflows
1 £30,188 £2,500 £27,688 0.909090909 £25,170.45
2 £37,275 £2,750 £34,525 0.826446281 £28,533.06

3 £40,803 £3,025 £37,778 0.751314801 £28,383.17
4 £44,754 £3,328 £41,427 0.683013455 £28,295.10
5 £49,180 £3,660 £45,520 0.620921323 £28,264.11
6 £54,136 £4,026 £50,110 0.56447393 £28,285.90
7 £59,688 £4,429 £55,259 0.513158118 £28,356.58
8 £65,905 £4,872 £61,034 0.46650738 £28,472.62
9 £72,869 £5,359 £67,510 0.424097618 £28,630.86
10 £80,668 £5,895 £74,773 0.385543289 £28,828.40
Net present value £281,220.25
The result shows that if couple stays in rented property then it would save money after 10 years
with present value will be £281,220 approx.
Recommendation
Based on financial analysis; it is advised for client to rent the property in Central London itself;
as through this decision they can save huge money. Both couple only wants to stay for 5 years;
hence, for short term decision rented property is best option (Zhai and Wang, 2016).
Considering non-financial factors and long term decision; it is advised to purchase new
property and give it on rent after 5 years. This option is suitable for long term; as the rent
received from this property which is £2,800 higher than monthly repayment £1,300 which is
more than half of rent received. This indicates that within 13 years property will get free of debt
and any rent received will be monthly income for the couple (Skevas, Wu and Guan, 2018).

References
Abor, J.Y., 2017. Evaluating Capital Investment Decisions: Capital Budgeting.
In Entrepreneurial Finance for MSMEs (pp. 293-320). Palgrave Macmillan, Cham.
Paquin, J.P., Gauthier, C. and Morin, P.P., 2016. The downside risk of project portfolios: The
impact of capital investment projects and the value of project efficiency and project risk
management programmes. International Journal of Project Management, 34(8), pp.1460-
1470.
Abernathy, J.L., Beyer, B., Downes, J.F. and Rapley, E.T., 2019. High-Quality Information
Technology and Capital Investment Decisions. Journal of Information Systems, pp.0000-
0000.
Imhanzenobe, J.O. and Adeyemi, S.B., 2020. Financial decisions and sustainable cash flows in
Nigerian manufacturing companies. International Journal of Management, Economics
and Social Sciences (IJMESS), 9(2), pp.90-112.
Hunjra, A.I., Bakari, H. and Batool, I., 2018. Application of Financial Decisions, their
Determinants, and Financial Performance: A Tabular Summary of Systematic Literature
Review. Empirical Economic Review, 1(2), pp.91-142.
Skevas, T., Wu, F. and Guan, Z., 2018. Farm Capital Investment and Deviations from the
Optimal Path. Journal of Agricultural Economics, 69(2), pp.561-577.
Zhai, J. and Wang, Y., 2016. Accounting information quality, governance efficiency and capital
investment choice. China Journal of Accounting Research, 9(4), pp.251-266.
Museloo, K.A. and Abartavi, S., 2017. Incorrect pricing impact on investment and the capital
structure of companies with financial constraints. International Journal of Economics
and Financial Issues, 7(2), p.319.
Right move, 2020; Available online through:
https://www.rightmove.co.uk/property-for-sale/Barking-And-Dagenham.html
London house prices, 2020; Available online through: https://www.theweek.co.uk/london-house-
prices#:~:text=House%20prices%20in%20London%20will%20rise%201.5%25%20in
%202022%20and,postcodes%2C%20but%20activity%20is%20returning.