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Risk analyses

The expected revenues for rentals are derived from multiplying the expected size of each land use by the expected price per square meter. On the other hand, expected revenues from sales are derived by dividing the net income from rentals by the average capitalization rate of each of the land uses. It is assumed that the average capitalization rates will not either rise or fall beyond the provided range. Again, both rentals and property sales will provide higher revenue for high quality construction than for low quality, that is, revenue for high quality construction is almost twice that of low quality in both scenarios (rentals and sales).

Risk analyses Every project is vulnerable to some form of risk. For this project, several risks are identified. These are possibility of the building to collapse, fire occurrence, loss of ownership and risks associated with performance of the real estate business. In case of the building collapse, the impact will be very heavy on the project, both due to loss of value and image. However, it is an unlikely occurrence. Therefore, this risk is classified as a medium level risk.

For fire occurrence, there is always a high probability that fire will break out, and

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its effects can be devastating especially to the building. Fire is thus a high level-high impact risk, whose impacts should be effectively reduced in case of occurrence. A significant reduction on fire impacts can be achieved by ensuring the building is sufficiently provided with fire extinguishers and sprinkler system. Loss of project ownership is not anticipated, given the capital value of the client. This is therefore a low level risk.

Even though it occurs, loss of ownership will not have heavy impacts on the project. Finally, with the global population increasing, demand for both housing and office space will increase, leading to increased value of the property. The real estate business is therefore projected to do well. However, this is also a function of the country’s economy. With good economic conditions prevailing, coupled with favorable policy and legal framework, the property should reap maximum revenue benefits. Net present Value and Net income value Low Quality

Given the high reputation of the firm, the firm’s capital rate is assumed at 16%. The initial investment is the sum of the cost of land and the cost of the other developments, and this will run for the first two years. Therefore, the cost is divided by two (2 years). Assuming that all facilities are rented (bringing net revenue of 226000) by the third year, NPV is derived using excel and the value is $785, 093. This is only 3% of the total cost of the project. The net rate of return is very low (-4%) assuming a 16% capital rate and this is therefore not a feasible project. High quality

The same assumptions are taken into consideration as in calculating NPV for low quality. Here, net revenue is $4,275,000. NPV value for high quality is $1, 077, 417. Again, this is 3% of the total cost of the project. Here, assuming a 16% capital rate, the net rate of return is also very low (2%), and the project is therefore not viable. Recommendation Both high quality and low quality construction are not viable. The client is advised to prioritize the other two investment projects. The client may also consider other forms of development, such as manufacturing or development of an amusement park.

Another approach would be to negotiate the price of land and conduct an analyses of the area’s other potential business opportunities. These will not provide insights on the best land best business opportunities, rather than residential neighborhood. References Brooklyn Academic. com (2008). Calculating NPV and IRR. Retrieved on 7/10/2008 from http://academic. brooklyn. cuny. edu/economic/friedman/npvirr. htm About. com (2008). How to calculate capitalization rate for Real Estate. Retrieved from http://realestate. about. com/od/knowthemath/ht/cap_rate_calc. htm

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