AR1MBE025 - Building Economics - online
Week 1:
Cash flow diagrams visualise initial investment, value or cash flows vis future
cash flows
Future value (FV): value of money over time:
An investeer deposit 100 euro (CF) in 2% interest rate (r) account:
FV = CF(cash flow) *(1+ r)^T(time)
This is called compounding (finding future values) (intrest over intrest) (FV)
Discount is finding person values (PV)
Present value (PV): value of future cash flow at t=0
Present value calculation: conceding future cash flows in present value
An investment for 150 euro cash return in 3 years. With a interest rate of
3%
PV = CF/(1+r)^T
Lump sum: one time recipe t or expenditure occurring in a given periode
Index of inflation: Consumer price index (CPI)
Nominal cash flows: refer to absolute amount of money
Real cash flows: reflect the change in the purchasing power (inflation)
Nominal to real return conversion
Rr= ((1+Rn) / (1+Iinf)) -1
Rr - real return
Rn - nominal return
Iinf - inflation rate
Return measures
– Period by period (periodic return) every month 10%
– Multi period return (cumulative value) Even moth 10% how much % is
that in total after 3 moths?
internal rate of return (IRR): calculate an investment rate of
return without including external factors
= equal to the discount rate in present value calculation
= the 10% every moth not the 11% in total after 3 moths
,Net Present Value (NPV): sum of all present values of a series of in- and
outgoing cash flows at time zero.
If NPV = 0 IRR of the investment is equal to the discount rate used
If NPV < 0 IRR of the investment is lower than the discount rate used
If NPV > 0 IRR of the investment is higher than the discount rate used
PV = (CF1*(1+Rcpi)^t)/(1+r)^t
NPV = (CF1*(1+Rcpi)^t)/(1+r)^t + (CF2*(1+Rcpi)^t)/(1+r)^t etc..
! If the NPV is positive it is worth pursuing, it create value.
If the IRR is higher than the interest rate you are making profit
Return requirements investor:
● Risk-free interest rate (normally that of a state bonds) +
● Risk premium - Higher the risk = higher discount rate
Adding a 2% risk premium to a 3% interest rate: significant effect on income
with slightly higher discount rates.
– Required IRR: minimum rate of return determined by the investor at
the commencement of the investment, taking into account the risk
profile (forward looking).
– Property risk premium (object specific)
– Real estate risk premium (function specific)
– Risk-free interest rate (normally that of a state bonds)
– Expected IRR: the expected return of the investment given the cash
flow projection (forward looking).
– Actual IRR: return that is actually achieved at the end of the life of the
investment (backward looking).
, Opportunity Cost of Capital (OCC): what is the expected return of other
investment opportunities with a similar risk profile.
The Opportunity Cost of Capital is determined on the capital market
Week 2:
Operating Cash flow
. Below-line approach
. Above-line approach: CAPX included in calculation of NOI
Week 1:
Cash flow diagrams visualise initial investment, value or cash flows vis future
cash flows
Future value (FV): value of money over time:
An investeer deposit 100 euro (CF) in 2% interest rate (r) account:
FV = CF(cash flow) *(1+ r)^T(time)
This is called compounding (finding future values) (intrest over intrest) (FV)
Discount is finding person values (PV)
Present value (PV): value of future cash flow at t=0
Present value calculation: conceding future cash flows in present value
An investment for 150 euro cash return in 3 years. With a interest rate of
3%
PV = CF/(1+r)^T
Lump sum: one time recipe t or expenditure occurring in a given periode
Index of inflation: Consumer price index (CPI)
Nominal cash flows: refer to absolute amount of money
Real cash flows: reflect the change in the purchasing power (inflation)
Nominal to real return conversion
Rr= ((1+Rn) / (1+Iinf)) -1
Rr - real return
Rn - nominal return
Iinf - inflation rate
Return measures
– Period by period (periodic return) every month 10%
– Multi period return (cumulative value) Even moth 10% how much % is
that in total after 3 moths?
internal rate of return (IRR): calculate an investment rate of
return without including external factors
= equal to the discount rate in present value calculation
= the 10% every moth not the 11% in total after 3 moths
,Net Present Value (NPV): sum of all present values of a series of in- and
outgoing cash flows at time zero.
If NPV = 0 IRR of the investment is equal to the discount rate used
If NPV < 0 IRR of the investment is lower than the discount rate used
If NPV > 0 IRR of the investment is higher than the discount rate used
PV = (CF1*(1+Rcpi)^t)/(1+r)^t
NPV = (CF1*(1+Rcpi)^t)/(1+r)^t + (CF2*(1+Rcpi)^t)/(1+r)^t etc..
! If the NPV is positive it is worth pursuing, it create value.
If the IRR is higher than the interest rate you are making profit
Return requirements investor:
● Risk-free interest rate (normally that of a state bonds) +
● Risk premium - Higher the risk = higher discount rate
Adding a 2% risk premium to a 3% interest rate: significant effect on income
with slightly higher discount rates.
– Required IRR: minimum rate of return determined by the investor at
the commencement of the investment, taking into account the risk
profile (forward looking).
– Property risk premium (object specific)
– Real estate risk premium (function specific)
– Risk-free interest rate (normally that of a state bonds)
– Expected IRR: the expected return of the investment given the cash
flow projection (forward looking).
– Actual IRR: return that is actually achieved at the end of the life of the
investment (backward looking).
, Opportunity Cost of Capital (OCC): what is the expected return of other
investment opportunities with a similar risk profile.
The Opportunity Cost of Capital is determined on the capital market
Week 2:
Operating Cash flow
. Below-line approach
. Above-line approach: CAPX included in calculation of NOI
