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%).

Table 2.1 Characteristics of two real estate projects

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

Probability Project A Project 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%

Best Investment Tips and Ideas

Best Investment Tips and Ideas

The dynamics of investing can be very emotional and stressful if not properly managed. When you are aware of what is all involved you give yourself the power to avoid those situations or at least manage them effectively. That will make your investments more exciting, rewarding, and enjoyable. Those positive factors will only lead to greater success in all that achieve with investments and life.

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