Lecture+4+FNCE+232+Mechanics+of+Investing

Lecture+4+FNCE+232+Mechanics+of+Investing - FNCE 232 Real...

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FNCE 232 Real Estate Investments Lecture 4 Mechanics of Real Estate Investing Professor C. F. Sirmans Office: Room 443 School of Business Office Hours: 2:30 - 3:30 Tu & Th
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Administrative Issues Real Estate Society Real Estate Scholarships Resumes for Internships and Jobs Teaching Assistants
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Review from Lecture 3 Cash Flow Forecasting – Small Apartment and Office Building Cases Who are the Participants? How are Participants related to the Cash Flow Statement?
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Converting Cash Flows into Value/Rate of Return To convert the expected cash flows into a “Value” or “expected” rate of return on an investment, we use the basic concepts of compound interest and present value.
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Mechanics of Valuation and Investment Decisions A. Compound Interest and Present Value B. Mortgage Mechanics C. SpreadSheet Tools D. Discounted Cash Flow Models/ NPV/IRR
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Calculating Value, Net Present Value and Rate of Return To Illustrate how to use the basic mechanics of compound interest and present value, consider the following simple example. (From Problem Set 1)
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A real estate investment has the following expected cash flows : Year Cash Flow 0 -100,000 1 10,000 2 12,000 3 10,000 4 15,000 5 110,000 What is the rate of return on this investment? At a required rate of return of 12%, what is the present value of these cash flows? What is the “net present value”? How much would an investor be willing to pay? Is this a “good” investment?
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Year Cash Flow PVF = 1/ (1.12)n PV @ 12% 0 -100,000 1.0 -100,000 1 10,000 .89286 8,929 2 12,000 .79719 9,566 3 10,000 .71178 7,118 4 15,000 .63552 9,533 5 110,000 .56743 62,417 Solution
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Solution NPV= -2,437 at a 12% discount rate.
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Lecture+4+FNCE+232+Mechanics+of+Investing - FNCE 232 Real...

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