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The Application of Cash Flow Analysis

in Real Estate Investment Appraisal

 

FEATURED PAPER

By Francis P. Udoudoh, PhD
Department of Estate Management, University of Uyo
Uyo, Akwa Ibom State, Nigeria

Mbosowo Ebong Ekpo, M.Sc.
Department of Estate Management, Akwa Ibom State Polytechnic
Ikot Osurua, Nigeria

 

 


 
Abstract

The aim of this paper is to examine the application of cash flow analysis in real estate investment appraisal. In every appraisal exercise, there are cash outflows and cash inflows; and the appraiser may adopt the discounting or non-discounting methods. The non-discounting methods differ from the discounting methods mainly on the premise that they do not take into account the timings of the returns from various projects and the risk factor associated with these returns. The discounted cash flow techniques can be used to produce Gross Present Value (GPV), Net Present Value (NPV), Internal Rate of Return (IRR) and External Rate of Return (ERR); while the typical examples of non-discounting appraisal techniques are Rate of Return (RR) and the Payback Period (PP) models. Based on the computation carried out, this research has shown that cash flows analysis is the basic prerequisite to determine the attractiveness or otherwise of a contemplated project. It concluded that discounted cash flow techniques do not tell an investor which scheme to invest in, but rather provide very useful financial information on which investment decision is based.

Introduction

Real estate investment appraisal is critical in any project proposal and execution, though the process differs from one investment to another. Cash flow analysis is one of the techniques of pre-investment appraisal as the primary concern of any appraiser is on how to estimate the cash inflows and cash outflows in order to determine the attractiveness or otherwise of a contemplated project. The analysis of cash flow helps in determining whether development proposals meet project requirements, that is, whether the project attains a certain level of returns within the specific timeframe. This method of analysis requires the use of appropriate discount rate. The discount rate is the cost of capital adjusted to reflect the degree of risk inherent in the particular investment proposal. It involves the explicit tabulation of all incomes and outgoings, and appropriate made where necessary to arrive at reasonable values. The technique is time-adjusted in that the analysis takes into consideration the effect of time on the value of money.

The aim of this paper is therefore to examine the application of cash flow analysis in real estate investment appraisal. The paper seeks to examine the various types of cash flows and their analytical techniques in real estate investment. A few case studies are employed to demonstrate their applicability.

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How to cite this paper: Udoudoh, F.P. & Ekpo, M. E. (2018); The Application of Cash Flow Analysis in Real Estate Investment Appraisal; PM World Journal, Vol. VII, Issue 6 – June. Retrieved from https://pmworldjournal.net/wp-content/uploads/2018/06/pmwj71-Jun2018-Udoudoh-Ekpo-cash-flow-analysis-in-real-estate-appraisal-featured-paper.pdf



About the Authors


Francis P. Udoudoh, PhD

University of Uyo, Nigeria
Uyo, Akwa Ibom State, Nigeria

 


Dr. Francis P. Udoudoh
holds B.Sc, M.Sc and Ph.D degrees in Estate Management from the University of Nigeria, Nsukka with specialization in Real Estate Development Appraisal and Urban Infrastructure Economics. He is an Associate Member of the Nigerian Institution of Estate Surveyors and Valuers, and registered with the Estate Surveyors and Valuers Registration Board of Nigeria (ESVARBON). He had served as the Secretary, Nigerian Institution of Estate Surveyors and Valuers, Akwa Ibom State Branch from 2006 – 2010; Chairman, Mandatory Continuing Professional Development (MCPD) for the same Branch from 2014 to date; and as Editorial Board member of many journals including Journal of the Nigerian Institution of Estate Surveyors and Valuers, Real Estate Journal, Artist Journal, among others. Dr. Udoudoh is the author of Real Estate and Infrastructure Economics in Urban Nigeria, and Co-Editor of Real Estate Development and Issues of Sustainability in Nigeria. He is currently a Senior Lecturer and Head, Department of Estate Management in the University of Uyo. He can be contacted at [email protected].

 

 


Mbosowo Ebong Ekpo

Akwa Ibom State Polytechnic,
Ikot Osurua, Nigeria

 

 

Mr. Mbosowo Ebong Ekpo holds both the Bachelor and Master of Science degrees in Estate Management from the University of Uyo, Nigeria. He is currently pursuing a Doctoral degree programme in Estate Management in the same university.  His area of interest is in Real Estate Investment Valuation. He is an Associate of the Nigerian Institution of Estate Surveyors and Valuers, and a registered Estate Surveyor and Valuer. Mr. Mbosowo is a Lecturer in the Department of Estate Management, Akwa Ibom State Polytechnic, Ikot Osurua and can be contacted at [email protected].