A simulation-based binomial model for building development appraisal
A simulation-based binomial model for building development appraisal
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Date
2021-02-19
Authors
LAWAL, Yarima Sallau IBRAHIM, Aliyu Makarfi MU'AWIYA Abubakar ISHAQ Ziyadul Hassan SA'AD Mohammed Mustapha
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Abstract
Purpose - Building developments are often capital intensive, have a long payback period and many
associated risks and uncertainties. This makes investments in building projects to be a big challenge. This
study aims to develop a computerized simulation-based binomial mode! (CSBBM) for building investment
appraisal with a view to improving the economic sustainability of proposed building projects.
Desigti/methodology/approach - Mathematical equations and algorithms were developed based on the
binomial method (KM) of real options analysis and then implemented on a computer system. A hybrid
algorithm that integrates Monte Carlo simulation (MCS) and BM was also developed. A real-life project was
used to test the mode!. Sensitivity analysis was also conducted to explore the influence of input variables on
development option value (IX)V).
Findings - The test result shows that the model developed provides a better estimate of the value of an
investment when compared with traditional net present value technique, which underestimate the value.
Moreover, inflation rate (i) and rental value (Ri) are the must sensitive variables for DOV. An increase in i and Ri
by just 5% causes a corresponding increase in DOV by 202% and 132%, respectively. While the least sensitive
variable is the discount rate (r), as an increase in r by 5% causes a corresponding decrease in DOV by just 9%.
The CSBBM is capable of determining the optimal time of development of buildings with an accuracy of 80.77%.
Practical implications - The hybrid model produces higher DOV than that of only the BM because MCS
considers randomness in uncontrollable variables. Thus, building investment decision-makers should always
use MCS to complement the BM in an investment analysis.
Originality/value - There is limited evidence on the use of this kind of hybrid model for determining DOV
in practice.
Keywords Sustainable construction, Construction management, Building investment, Binomial
method, Development option, Monte Carlo simulation
Paper type Research paper