An investigation into the use of discounted cash flow techniques for predicting the risk/return trade-off for residential subdivisions

Abstract

Risk and return is critical to the decision making process in residential subdivisions yet its treatment has generally been on an ad hoc or rule of thumb basis. Much of the written knowledge base on this subject is dated and very little has been written on the use of DCF for analysing residential subdivisions. Further, while there is a great body of information relating to risk assessment/analysis the written material in relation to residential subdivisions is minimal. This dissertation centralises much of the existing written knowledge base and considers the use of DCF in a residential subdivision context. Risk assessment/analysis is also viewed solely in a residential subdivision context. The DCF approach and hypothetical subdivision approach were identified as having some validity for predicting the risk/return for residential subdivisions. Through the use of case studies and sensitivity testing a practical framework for predicting the risk I retum trade-off for residential subdivisions has been established and this clearly demonstrates that an adjusted DCF using split discount rates is a superior approach to the hypothetical subdivision approach.