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The Economics of Property & Construction

Question 1
The analysis of strategic alternatives and the commitment of resources to investments involve a complex set of economic trade-offs, viewed within a competitive framework. Two of the most common methods for the assessment of financial viability are the net present value (NPV) and the internal rate of return (IRR) methods. This section compares and contrasts the nature of the NPV and the IRR investment appraisal methods.

The NPV of a flow of cash is a system proposed by many as the best for evaluating building-related options. The NPV is a direct measure of value creation as well as a screening device that indicates whether a stipulated minimum return standard, such as the cost of capital, can be met over an investment proposal's economic life. NPV is the discounted value of cash inflows less discounted cash outflows. When NPV is negative, the minimum return standard and capital recovery cannot be achieved with the projected cash flows. When NPV is close to or exactly zero, the return standard has just been met. In this case the investment will be value neutral. When NPV is positive, there is potential for a return in excess of the standard and therefore, economic value creation (Ross et al., 2006).

Finally, Thrall (2001) notes that the most important market force that drives the local real estate market is that market's economic base. The amount of GDP produced at a particular location can have multiplier effects in that community, thereby stimulating further wealth and more GDP. Part of that increase and flow of GDP goes into real estate. However, the increase in GDP is not smooth or continuous. Fluctuations in GDP can be quite high, leading to rapid urban development as well as downward spirals.

In conclusion, there are several economic forces that shape the land use patterns in a typical capitalist city. Additionally, there are several other factors which impact land use patterns in cities, some of which have been mentioned here. Important among these are modes of transportation, which has a dramatic effect on the population density and on the willingness of the population to move away from their favoured nodes. Also important in recent times is the distributed work environment, where the workforce is connected electronically, which has the potential to dramatically change office markets. Bertaud (2004) notes that these information and communication technologies that allow having production, design and management in different locations further encourage the land intensive production functions, such as industrial land use, to move further out of the city centre where land is cheaper.

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