Real Estate Valuation 02

Question 1

Value Additivity

Answer 1

cash flows from the same period are equivalent both in original value and PV
- therefore we can add, multiply, subtract etc.
- but we can’t compare CF from different periods
- but: discount rate must be the same

Question 1

Perpetuities

Answer 1

• CFs from different time periods where CFs are identical
• CFs last forever
• CF / r

Question 2

Annuities

Answer 2

• CFs from different time periods where
• CFs are identical
• ## fixed number of consecutive periods

Question 3

Growing Perpetuity`

Answer 3

CF / r-g

Question 4

profitability Index
Decision Rule

Answer 4

• accept projects with PI equal to or larger than 1

Question 5

Profitability Index
Definition

Answer 5

• ratio of PV of future cash flows (NPV) to initial cost of project (resources consumed)

Question 6

Payback Period

Answer 6

• amount of time it takes to pay back initial investment
• accept project when payback period is smaller than decision criterion

Question 7

Physical Characteristics of Real Estate

Answer 7

• Immobility
• Indestructibility [Land is indestructible, Improvements are not]
• Uniqueness [no 2 lots or tracts of land are the same]

Question 8

Economic Characteristics of Real Estate

Answer 8

• Scarcity [fixed supply]
  -** Location **[area preferences as most important characteristics]
• improvements [house, infrastructure etc. highest and best use]
• Permanence of investment [disadvantage: lack of liquidity]