With the Xinaps Financial Simulator plug-in you can easily define the return on investment of the building based on the building model. For a building property investor it is essential to understand the net present value of the building in order to know the financial business case and the expected building profit. The property investor wants to compare the property investment to other financial options (other investments, shares, debentures).
Topics in this section
- Output
- Input
Output
Net present value
The NPV is the sum of the present values of incoming (fees) and outgoing (costs) cash flows over a period of time. You are aught to make profit if the net present value is positive. You are aught to make loss if the net present value is negative. It is calculate with the formula:
If… |
It means... |
Then... |
| NPV > 0 |
the investment would add value to the firm |
the project may be accepted |
| NPV < 0 |
the investment would subtract value from the firm |
the project should be rejected |
| NPV = 0 |
the investment would neither gain nor lose value for the firm |
we should be indifferent in the decision whether to accept or reject the project. This project adds no monetary value. Decision should be based on other criteria, e.g., strategic positioning or other factors not explicitly included in the calculation. |
You may have a look at our Example Net Present Value and Cashflow Calculation.
Pay-off time
The POT represents the amount of years you need to pay off your investment. It takes into account the present values over time. The period of time to reach the break even point. A negative sum of present values gives a negative pay-off time.
Return on Investment (as part of NPV)
The Return on Investment or Rate of Return is the percentage of financial return compared to the initial investment. In our case it compares the Net Present Value to the Construction Costs.
Net Cashflow (chart)
The Net Cashflow is the annual cash inflow minus the cash outflow. In our case the rental fees stand for the cash inflow and the running costs stand for the cash outflow. Inflation rates included.
Present Value (chart)
The present value of the annual cash flow. The present value differs per year, and is calculated with formula:
Where:
-
= the year of the cash flow -
= the discount rate -
= the net cash flow at year t.
Balance Value (chart)
Internal Rate of Return (as part of NPV)
The IRR is also called the discounted cash flow rate of return or the effective interest rate. The height of the discount rate to make the project break even, so when the net present value returns zero. A negative net present value gives a negative internal rate of return.
Input
Construction Costs
Costs to initate, design, and construct the building. The result from the "Construction Costs" tab is used.
Running Costs
Costs to use, manage, and maintain the building. All annual returning costs the building owner needs to make to keep the building usable. Primary costs are maintenance costs, management costs, and real estate agent costs. Secondary costs are cleaning costs, energy costs, service costs. Secondary costs can also be paid by the building occupants themselves. These costs can be defined per occupancy type of the rooms, total costs or per floor area.
Rental fees
Income for the building owner when the building is going to be rented. All annual returning income received from the building tenants. These fees can be defined per occupancy type of the rooms, total costs or per floor area.
Construction Period
The amount of years how long the initiation, design, and construction of the building take. The longer the building period, the later the exploitation costs and rental fees start, the less profit you are aught to make with the building.
Exploitation Period
The amount of years how long you want to exploit the building before selling, amortizing or demolishing the building. The longer you can exploit the building, the more profit you are aught to make.
Discount Rate
The risk rate of the investment. The rate used to discount future cash flows to the present value is a key variable of this process. Related factors are vacancy risks, price fluctuations, interest rates, and currency prices. A medium risk discount rate is 7 to 8 %. With a higher discount rate you create a safer, risk free financial business case. For the inflation rates you can use your country specific annual discount rates, or agree this with your client or assets manager.
Residual Value
The residual value or terminal value is the expected building property value after the building period. The expected value is dependent from the geolocation, the building quality, and the timeless design. The residual value of a building has less effect on the Net Present Value than you might expect.
Inflation Rate (running costs and rental fees)
A sustained annual increase in the price level of running costs and rental fees per year. An inflation rate for Running Costs of 1% is medium. An inflation rate for Rental Fees of 3% is medium. For a good indication of inflation rates you can use your country specific annual inflation rates, or agree the rates with your client or assets manager.