Question

In an inflationary environment, cash flows in future years will have less purchasing power than those in earlier years. Thus, a multiple-year cash-flow forecast is not a consistent measure of a property’s performance. How might this difficulty be addressed?

Operating expenses cannot be estimated based on experience and are totally unrelated to revenue projections. Do you agree? Discuss.

Give some examples where relative transfer costs have been altered enough to shift the competitive positions of properties in the area.

Answer 1

A)In inflationary environment, the cash flows of the future years will be lower due to the effect of inflation discounted into the cash flows and hence, multiple year cash flow forecast is not a consistent measure for the property performance so we should be trying to use a risk adjusted and inflation adjusted cash flow which will be constantly depreciating the overall value of the cash flows for various years are we can even use the net present value in order to determine the the future value cash flows at the present so we can either use risk adjusted cash flows which are not uniform in multiple years or we will be using net present value in order to discount the cash flows.

B) operating expenses are cost which will be involved in running day-to-day operations of the company and they will be making a majority of the company's expenses and hence this given statement is false because operating expense will be based upon the experience of running the business and it will be related to revenues projection to a large extent it will be providing various insights about day-to-day operations and cost cutting methods in order to boost to the overall profits and revenues.

C) various types of direct cost like additional surfacing and repairment has been shifted in order to reduce the overall cost.

Costs like advisory services and inspections costs are also transferred.