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An analysis of the use of discounted cash flow methods and real options to value flexibility in real estate development projects
Includes abstract.
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| Other Authors: | |
| Format: | Thesis |
| Language: | English |
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College of Accounting
2014
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| _version_ | 1867613839858597888 |
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| access_status_str | Open Access |
| author | Bauer, Michael |
| author2 | Correia, Carlos |
| author_browse | Bauer, Michael Correia, Carlos |
| author_facet | Correia, Carlos Bauer, Michael |
| author_sort | Bauer, Michael |
| collection | Thesis |
| description | Includes abstract. |
| format | Thesis |
| id | oai:open.uct.ac.za:11427/5628 |
| institution | University of Cape Town (South Africa) |
| language | eng |
| last_indexed | 2026-06-10T12:42:32.038Z |
| license_str | Not specified — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from UCTD — University of Cape Town Open Access Repository |
| publishDate | 2014 |
| publishDateRange | 2014 |
| publishDateSort | 2014 |
| publisher | College of Accounting |
| publisherStr | College of Accounting |
| record_format | dspace |
| source_str | UCTD — University of Cape Town Open Access Repository |
| spelling | oai:open.uct.ac.za:11427/5628 An analysis of the use of discounted cash flow methods and real options to value flexibility in real estate development projects Bauer, Michael Correia, Carlos Real Estate Investment Analysis|real option analysis|property development|strategic risk management Includes abstract. Includes bibliographical references (leaves 68-71). Surveys of firms outside the property sector indicate the growth in the use of DCF methods such as the NPV and IRR methods to evaluate projects as compared to the use of such naïve methods as Payback and the Accounting rate of return. The growing convergence of theory and practice is indicated by the growing use of the NPV method. The objective of this study is to determine the capital budgeting methods used to evaluate real estate development projects and to compare the results of a survey with the results of other studies. Further, recent developments in capital budgeting theory, indicate that the investment valuation tools such as the Net Present Value (NPV), Internal Rate of Return (lRR), Payback Period (PP), and theAccounting Rate of Return (ARR) may fail to recognize flexibilities in real estate development projects. As a consequence, the discounted cash flow methods (DCF) may systematically undervalue strategic or large-scale real estate development projects. Two methods are introduced as an alternative to address the weaknesses of the DCF methods. Decision Tree Analysis (DTA) employs an approach to analyse flexibilities by creating a chain of possible options and allows alternative courses of action for management to adapt their initial strategies in order to capitalise on new opportunities or to minimise losses. Real Option Analysis (ROA) introduces the theory of valuing financial derivates, in particular call options, and allows the staging of the development. These instruments further introduce a risk management aspect, as call options have a limited down side and an unlimited upside. Each approach has advantages and shortcomings and should only be used in appropriate circumstances. DTA is suited for the analysis of the project specific risks. ROA on the other hand, is a superior tool when dealing with uncertainty. The thesis finds that that over 90% of all respondents are using a combination of NPV and IRR methods most often to evaluate development opportunities. Interestingly, 85% of all respondents are also using the payback period. Other methods used are the profitability index, residual value, free cash flow, economic value, and return on equity. Developers have adopted DCF methods such as NPV and IRR as the primary methods to evaluate projects rather than naïve methods such as Payback and ARR, although these latter methods remain in use. The use of decision tree analysis and real option analysis is very limited. 2014-07-31T12:14:16Z 2014-07-31T12:14:16Z 2007 Master Thesis Masters MCom http://hdl.handle.net/11427/5628 eng application/pdf College of Accounting Faculty of Commerce University of Cape Town |
| spellingShingle | Real Estate Investment Analysis|real option analysis|property development|strategic risk management Bauer, Michael An analysis of the use of discounted cash flow methods and real options to value flexibility in real estate development projects |
| thesis_degree_str | Master's |
| title | An analysis of the use of discounted cash flow methods and real options to value flexibility in real estate development projects |
| title_full | An analysis of the use of discounted cash flow methods and real options to value flexibility in real estate development projects |
| title_fullStr | An analysis of the use of discounted cash flow methods and real options to value flexibility in real estate development projects |
| title_full_unstemmed | An analysis of the use of discounted cash flow methods and real options to value flexibility in real estate development projects |
| title_short | An analysis of the use of discounted cash flow methods and real options to value flexibility in real estate development projects |
| title_sort | analysis of the use of discounted cash flow methods and real options to value flexibility in real estate development projects |
| topic | Real Estate Investment Analysis|real option analysis|property development|strategic risk management |
| url | http://hdl.handle.net/11427/5628 |
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