Sensitivity Anaylsis

Question 1

What are the typical measures of return?

Answer 1

1. Cash-on-Cash Return
2. Cap Rate
3. Unleveraged IRR
4. Leveraged IRR
5. After-Tax-Leveraged IRR
6. Investor’s Before-Tax IRR

Question 2

How do you partition the IRR?

Answer 2

1. Breakdown between operating cash flows and reversion cash flows PV of the entire project.
2. PV of the Cash Flow from Ops (%) PV of the Cash Flow from Sale (%)

Question 3

What are the 2 approaches of a sensitivity analysis?

Answer 3

Changing 1 assumption at a time. Combing assumptions to create multiple scenarios

Question 4

What are the drivers of Cash Flows from Operations (sensitivity analysis)?

Answer 4

• Initial Rents
• Vacancy Rates
• Inflation

Question 5

What are drivers of cash flows from investing activities (sensitivity analysis)?

Answer 5

• Stabilized cash flows at sale
• Going-out cap rate

Question 6

What are the drivers of cash flows from financing activities (sensitivity analysis)?

Answer 6

• Leverage Ratio (loan)
• Interest Rate
• Amortization
• Equity
• Investor Returns

Question 7

What effect will the variables have on sensitivity analysis?

Answer 7

Question 8

What are the step to sensitivtiy anaylsis?

Answer 8

1. Identify the Variables
2. Confrim effect of Varibales
3. Setup Baseline, Optimistic, & Pessimistic
4. Setup Live Test in Sensitivity Anaylsis sheet and run live data
5. Calculate Risk Premium-to-Risk Ratio

Question 9

What is the Risk Premium-to-Risk Ratio?

Answer 9

The return given for each additional 1% of risk taken on a project.

Question 10

What is the equation for Risk Premium-to-Risk Ratio?

Answer 10

(Return - Risk Free Rate)

________________(divide)

Range of Possible Return