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2.2 How Investors Use Sensitivity Tables ✅

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2.2 How Investors Use Sensitivity Tables ✅

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Questions and Answers

What is the primary purpose of using a sensitivity table in investment analysis?

To identify the potential risks of the deal

To compare multiple investment options

To assess the impact of changing key variables on investment performance (correct)

To finalize the deal terms with a bank

Why is the exit cap rate considered to have a significant impact on the IRR?

It directly affects the rental growth rate, leading to substantial changes in the IRR.

It is directly linked to the loan to value ratio, influencing the IRR significantly.

It is inversely proportional to the market interest rate, causing drastic fluctuations in the IRR.

A small change in the exit cap rate results in a large change in property value, affecting the cash flow significantly. (correct)

In the context of sensitivity tables, why might an investor focus more on understanding factors affecting the exit cap rate than on rental growth rate?

The exit cap rate is directly linked to the market interest rate, which affects IRR more significantly.

Rental growth rate is less predictable and has a smaller impact on IRR.

The exit cap rate has a larger impact on property value and cash flow. (correct)

Understanding the exit cap rate requires less effort than understanding rental growth rate.

How does an increase in market interest rate affect the levered IRR?

<p>It decreases</p> Signup and view all the answers

What is the impact of higher loan to value (LTV) and higher interest cost on the levered IRR?

<p>It may still result in a higher IRR, depending on the overall increase in LTV and interest cost.</p> Signup and view all the answers

Study Notes

Investment Analysis with Sensitivity Tables

The primary purpose of using a sensitivity table in investment analysis is to examine how changes in variables affect the Internal Rate of Return (IRR).

Impact of Exit Cap Rate on IRR

The exit cap rate has a significant impact on the IRR because it directly affects the projected sale price of an investment property.
A small change in the exit cap rate can result in a significant change in the IRR.

Factors Affecting Exit Cap Rate and Rental Growth Rate

An investor might focus more on understanding factors affecting the exit cap rate than on rental growth rate because exit cap rate has a more significant impact on the IRR.
This is because the exit cap rate is more uncertain and harder to predict than rental growth rate.

Effect of Market Interest Rate on Levered IRR

An increase in the market interest rate decreases the levered IRR, making the investment less attractive.

Impact of Loan to Value (LTV) and Interest Cost on Levered IRR

A higher loan to value (LTV) and higher interest cost decrease the levered IRR, reducing the investment's attractiveness.
This is because higher LTV and interest cost increase the borrower's costs, reducing the overall return on investment.

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Description

"Understanding Sensitivity Tables for Investors: Analyzing Interest Rate Impact" - Learn how investors use sensitivity tables to assess the risk of a deal by varying interest rates on loans. This quiz explores the practical application of sensitivity tables in evaluating investment risks.