REM211: INVESTMENT

VALUATION AND APPRAISAL

Chapter 4: Appraisal of property investment

Dr Nor Nazihah bt Chuweni

 Chapter 4:
Appraisal of
property investment

Introduction Equated yield

What is DCF? CHAPTER 4 Equivalent yield

Calculation of NPV What is IRR?

 Introduction

What is Discounted DCF involves the Methods of

appraisal? cashflow discounting of future DCF?
receipts and
Valuation – estimation Both valuation and expenditures similar to Two principals methods
of the price of property analysis should be the investment method – Net Present Value
investment, appraisal is carried out together to of valuation but its (NPV) method and
beyond the valuation complete the appraisal allow for inflation, Internal Rate of Return
including the analysis exercise. The technique taxation and frequent (IRR) method
to estimate the worth used in appraisal changes in the amount
of property investment include DCF of income and receipts
 Methods of DCF

To calculate
Net Present Value
RM …..

Discounted
Cash flow

Customer Internal rate of

To calculate …..%
Objectives return.
 Net Present Value

Interest rate should be paid

Borrowing rate when obtained loan from
financial institutions

Rate of return
used in DCF Opportunity rate Best and safe rate available in
(discount rate) the investment market

The investor’s target rate to

compensate the risk involved and
Target rate
loss of immediate consumption
and inflation
Example:
In investment market, there are 5 investment option to choose from which have different IRR and NPV. In
this example, the investor borrow money at a rate of 8% per annum.

Investment Internal Rate of Return Net Present Value

A 9.3% RM750

B 8.0% RM0

C 5.3% -RM600

D 0% -RM750

E -2.4% -RM1,286
 Net Present Value

What is NPV?

The NPV is ‘the total

MARKET Present Value of Discount rate if the NPV more than
ANALYSIS revenues less the total 0; the
Present Value of Borrowing rate project/investment is
. expenditures or Opportunity cost rate worth undertaking. So, if –NPV what does
expenses’ of the Target rate it shows to the
investment. In order to The greater the NPV, investor?
derive the value, the the better is an
discount rate is use i.e investment.
the Present Value of
RM1
Example:

Calculate the NPV of a property investment which will produce a rental income of RM12,000 per annum
(net) over 5 years, using target rate of 10% per annum. The current rental value for such properties is
RM18,000 per annum and ARY is 7%. The investment requires a capital of RM200,000. Advise the
investor.

Year Cashflow YP @ ARY% PV RM 1 @ discount rate Total PV

RM 7% 10% RM
1 12,000 - 0.9091 10,909
2 12,000 - 0.8264 9,917
3 12,000 - 0.7513 9,016
4 12,000 - 0.6830 8,196
5 12,000 - 0.6209 7,451
Reversion 18,000 14.2857 0.6209 159,660
Total NPV 205,197
Less capital invested: -200,000
NPV = 5,197
TUTORIAL:

1. A property is currently let to a tenant for 6 years at rent reserved of RM15,000 per
annum (net). The rental value of similar property are RM18,000 per annum and ARY
for this property is 6%. Calculate the NPV if the investor’s target rate of return is 10%
and the offered price is RM300,000.

What is the NPV? Do we proceed with investment?

2. What if the investor’s target rate of return is 7% or 8%, is it +ve NPV?

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Thank You