## Risk assessment example single project

As an investor you are offered a real estate project with the following characteristics:

• The expected lifetime is 30 years.

• The investment is estimated at € 10 million. You think that there is a 10% chance that the investment will be more than € 14 million and you think here is a 10% chance that the investment will be less than € 9 million.

• The cost of capital is estimated at 4%. You think that there is a 10% chance that the cost of capital is more than 6% and you think there is a 10% chance that the cost of capital is less than 3%.

• The yearly net exploitation result is estimated at € 1.2 million. You think that there is a 10% chance that the yearly exploitation result is more than

Figure 2.2 Output illustration of Monte Carlo simulation

€ 1.3 million and you think here is a 10% chance that the yearly exploitation result is less than € 0.9 million.

• The rest value is estimated at € 2 million. You think that there is a 10% chance that the rest value is more than € 2.1 million and you think here is a 10% chance that the rest value is less than € 1.8 million.

You are interested in the risk associated with this project. You want to approve the project if it will have an 80% probability that its profit will be at least 5%. Input the data into the program or open the file [O e_mcs-1.mis]. Press the 'Perform Project Simulation' button to start the simulation.

The output (Fig. 2.2) shows a mean profit of 6.6% with a standard deviation of 1.3%. The probability P that the profit will exceed a threshold R according to formula (4.1) (page 48) of Open Design, a Collobarative Approach to Architecture, is represented in the S-shaped graph. Note that the mean of 6.6% corrresponds with a 50% probability that the profit will exceed that value.

The project meets the criterion for approval (20% probability that the profit will be less than 5.4%).

 Project A Project B Low Best High Low Best High Investment [€ billion] 9 10 14 7 12 17 Interest [%] 3 4 6 34 6 Revenues [€ billion] 0.9 1.2 1.3 1.1 1.3 1.6 Rest value [€ billion] 1.8 2.0 2.1 1.8 2.0 2.2

Table 2.2 Risk profiles project A and B

 (cumulative) 90% 4.8% 3.4% 80% 5.4% 4.3% 70% 5.9% 5.0% 60% 6.3% 5.6% 50% 6.6% 6.3% 40% 7.0% 7.0% 30% 7.3% 7.9% 20% 7.7% 9.0% 10% 8.3% 10.5%

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