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A Pedagogical Tool to Assist in Teaching Real Estate Investment Risk Analysis

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  • William Weaver
  • Stuart Stetson

Abstract

This paper presents a simple Excel model that provides measures of the standard deviation of forecasted internal rate of return (IRR) given traditional data inputs such as annual cash flows, terminal values and equity. The model first calculates IRR using traditional discounted cash flow methods and then provides heuristic estimates of variability measured in terms of “high,” “low” and “most likely” values. It also provides an actual measurement of risk in terms of mean and standard deviation and upper and lower quartiles, along with a graphical presentation of various risk parameters. The only additional analysis required is an estimation of the variability of periodic cash flows and the terminal value of the investment.

Suggested Citation

  • William Weaver & Stuart Stetson, 2004. "A Pedagogical Tool to Assist in Teaching Real Estate Investment Risk Analysis," Journal of Real Estate Practice and Education, Taylor & Francis Journals, vol. 7(1), pages 43-52, January.
    • Handle: RePEc:taf:rjrpxx:v:7:y:2004:i:1:p:43-52
    DOI: 10.1080/10835547.2004.12091601
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