Engineering Engineering Economics - Combined return with cost to fix it?

[adamaero]

Homework Statement

What is the return?

Relevant Equations

NOI/(downPayment+rehab)

Say the annual return for a *used* widget producing machine is this:
`12*500/(5000+15000)` = 30%
It cost 5k for the loan to buy the machine and 15k to fix it to start.

Two years later, it is refinanced for a 30 year term. Is that initial 15k still in the denominator? What if it was refinanced two seconds later?

`12*600/(33000+15000)` = 15%

I am trying to determine the overall (average) return of an investment with a great return in the first two years, but a mediocre return for the rest of the new loan.

`(2*30% + 30*15%)/32` = 16% average

 

[Chestermiller]

Are you familiar with "discounted cash flow analysis?" Can you please list the cash flows for this investment and the times that each of these cash flows occurs?

 

[adamaero]

Are you familiar with "discounted cash flow analysis?" Can you please list the cash flows for this investment and the times that each of these cash flows occurs?

Yes, this is used for commercial. I am exclusively looking at residential investments. So while it could be used for fun, an appraiser would not use it in their valuation (at least in my area).

I realized two options could be a solution. I first tried to assume the cost to fix does not improve the value. Instead I should have the value increasing 0.5:1 or even as much as 1:1. Alternatively, an ARV could be used.

 

[Chestermiller]

Discounted cash flow is the only meaningful and valid method of evaluating an investment (in my judgment). I can see that you are not willing or are unable to make a list of cash flows vs time for the various alternatives. Sorry to hear that. If you do list the cash flows for the various alternatives, I would be pleased to evaluate the ROI for you (using continuous compounding or compounding at specified intervals). Otherwise, I'm not going to be able to help you consider alternatives using inferior methodologies..

 

[adamaero]

Oh, I agree as a tool to determine a maximum allowable offer (MAO). But for the deal analysis as the question is posed it doesn't make much sense.

Evaluating ROI also does not apply in this case and especially not for the purpose of my investment strategy. All investments will be put into trusts or sold off at such a far off date that there is no use to speculate on what they will appreciate to then.