Discounted Cash Flow Analysis

1
Chapter 24

• Discounted Cash Flow Analysis
• Used to Solve for PV Given a Rate of Return or
  Solve for Rate of Return Given a Value
• Use Spreadsheet to Detail Income, Expenses,
  Capital Expenditures and Net Resale Over Holding
  Period
• Calculate PV or Rate Based on These Cash Flows

2

• Criticism of DCF
• Small Errors Can Have Major Implications
• Difficulty of Projecting Future Cash Flows
• Forecasting
• Current and Future Rent
• Escalation Provisions
• Re-leasing and Tenant Turnover
• Operating Expenses
• Expected Reversion
• Economic Trends

3

• Net Present Value (NPV)
• PV of All Income All Expenditures Over Holding
  Period
• Project Feasible If NPV Is Positive
• Internal Rate of Return (IRR)
• Discount Rate Where NPV 0 (Original Investment)
• Find IRR by Trial and Error, Graphically, or With
  a Calculator or Computer

4

• Limitations More That 1 IRR, Negative IRR,
  Little or No Equity
• No Reinvestment With IRR
• Before Tax IRR Everyone Has Different Brackets,
  Some Investors Are Tax-free, Other Investments
  Reported Before Tax
• After Tax IRR Tax Shelters Are Important in Real
  Estate Investment
• Alternative IRRs
• IRR With Reinvestment
• IRR With a Specified Borrowing Rate

5

• Business Enterprise Value
• Calculate All Components Separately
• Difficult, Therefore Controversial
• Partial Interests
• Leases Must Be Transferable to Have Market Value
• Can Still Have Economic Value Even If Not
  Transferable