A Comparison of Monte Carlo Simulation and Discounted Cash Flow Investment Appraisal Techniques Using an Office Building in Akure, Nigeria

Abstract

Every rational investor aimed to secure an optimum return from an investment at certain level of risk. However, the factors that affect the realization of the expected return are not known with certainty. Therefore, the reliability of a single point estimate for investment decision is debatable particularly when the likelihood of realizing the expected return is crucial to the investor. This study aimed at examining a better method of analysing the uncertainty in property investment rather than the use of the single point estimate formula. We collected a set of historic data from a multi-tenanted office complex in Akure to carry out the investment analysis using Monte Carlo simulation and Discounted Cash Flow Technique. The results from the study were compared and revealed that the single point estimate accounted for a huge level of risk as probability of realizing the expected return is unknown. The Monte Carlo simulation offers a more robust opportunity for a measured investment decisions by providing a probability of realizing different level of the expected returns. The study concludes that it is difficult to make a smart investment decision on a single point estimate. It therefore recommends the use of Monte Carlo simulation for property investment analysis for a more realistic return.