DCF Flashcards
You have been advised by an agent marketing a development site that you are likely to be the successful bidder at the auction if you are prepared to pay $3,600,000 at auction. You have completed your research and believe the development will have the following cash flows:
Year 1 ( 5,200,000)
Year 2 ( 2,500,000)
Year 3 16,000,000
Year 4 3,000,000
On the basis that you are happy to achieve a hurdle rate of 20%, how much can you bid up to at auction?
NOTE - Round your answer to the nearest dollar
Between 4,636,573 and 4,636,575
- CFi+2ndF+CA - Clear the cashflows
- Use ENT to enter the cash flows one by one
CFO 0
CF1 ( 5,200,000)
CF2 ( 2,500,000)
CF3 16,000,000
CF4 3,000,000
2ndF+cash to enter the discount rate
I/Y = 20
use the down arrow button to choose NPV
COMP NPV = 4,636,574
A DCF assessment has been prepared which incorporates a purchase price for the site within the cash flow. The resulting NPV calculation is +$500,000. This means:
NOTE: Select all correct answers.
A. We could increase the purchase price by $500,000 and still achieve our required rate of return
B. The Internal Rate of Return will be greater than the Discount Rate we used
C. We need to decrease the purchase price by $500,000 for the deal to stack up
D. The project does not achieve the hurdle rate
B. The Internal Rate of Return will be greater than the Discount Rate we used =.
After allowing for the purchase price in a DCF feasibility assessment, if the resulting Net Present Value is “0”, then:
NOTE - select all correct answers
A. The raw site has no value
B. The Internal Rate of Return is the same as the Discount Rate
C. The project is not viable
D. The project looks worthwhile
B. The Internal Rate of Return is the same as the Discount Rate
D. The project looks worthwhile
After allowing for the purchase price in a cash flow model, if the resulting NPV is negative, that would mean:
NOTE: Select all correct answers
A. We need to decrease the purchase price by the negative NPV amount for the project to achieve our desired rate of return
B. The IRR will be less that the Discount Rate we used
C. The IRR will be greater that the Discount Rate we used
D. The project is not viable
A. We need to decrease the purchase price by the negative NPV amount for the project to achieve our desired rate of return
B. The IRR will be less that the Discount Rate we used
D. The project is not viable
Select all terms which may be used to describe an actual or desired rate of return on money used within a property development.
A. Internal Rate of Return (IRR)
B. Target Discount Rate
C. Discount Rate
D. Hurdle Rate
A. Internal Rate of Return (IRR)
B. Target Discount Rate
C. Discount Rate
D. Hurdle Rate
When using the DCF approach to complete a feasibility assessment, which of the terms below are likely to mean the resulting / raw current market value of the development site:
NOTE - Select all correct answers
Internal Rate of Return (IRR)
Net Present Value (NPV)
Residual Land Value (RLV)
Hurdle Rate
Net Present Value (NPV)
Residual Land Value (RLV)
A Rate of Return (usually described as an IRRs, Discount Rate, Target Discount Rate or Hurdle Rate) is used to discount future cash flows to determine there value in todays dollars. The sum of the PV of each future cash flow is called the NPV (net present value) and normally reflects what you would pay today for the whole deal. The amount we would pay for the site is also referred to as the RLV (Residual Land Value).
This term (RLV) reflects the process we have undertaken being that we started the feasibility by working out what we could sell the finished product for and then deducted all costs including a rate of return on the money we are using to work back to what we can afford to pay for the raw site. This is the Residual Land Value (ie what we have left to pay for the land).
You are required to value a development site using the DCF approach. You anticipate the development will show the following cash flows:
Year 1 ($ 8,000,000)
Year 2 ($ 3,000,000)
Year 3 $15,000,000
Year 4 $ 7,000,000
Adopting a discount rate of 25%, what is the maximum amount you would offer for the site?
NOTE: Round your answer to the nearest whole dollar.
Between 2,227,199 and 2,227,201
If you can not remember how to operate this function on your calculator, refer to the “Financial Concepts for Property” student workbook page 87. Your Data Inputs should be as follows:
CF0 = 0
CF1 = (8,000,000)
CF2 = (3,000,000)
CF3 = 15,000,000
CF4 = 7,000,000
I = 25
COMP NPV = answer $2,227,200
You are required to value a development site using the DCF approach. You anticipate the development will show the following cash flows:
Year 1 ($ 8,000,000)
Year 2 ($ 3,000,000)
Year 3 $15,000,000
Year 4 $ 7,000,000
What rate of return will you achieve if you purchase the property for $3,000,000 ?
NOTE: Round your answer to 2 decimal places (also do not include any % symbol in your answer).
CF0 = (3,000,000)
CF1 = (8,000,000)
CF2 = (3,000,000)
CF3 = 15,000,000
CF4 = 7,000,000
COMP I/Y
Answer = 21.316
You have been advised by an agent marketing a development site that you are likely to be the successful bidder at the auction if you are prepared to pay $3,600,000 at auction. You have completed your research and believe the development will have the following cash flows:
Year 1 ( 5,200,000)
Year 2 ( 2,500,000)
Year 3 16,000,000
Year 4 3,000,000
What rate of return are you likely to achieve if you pay $3,600,000 for the site?
NOTE - Round your answer to 2 decimal places
CFO ( 3,600,000)
CF1 ( 5,200,000)
CF2 ( 2,500,000)
CF3 16,000,000
CF4 3,000,000
COMP I/Y = 25.345
You have paid $ 2,200,000 for a development site 2 years ago. Since the date of purchase the market has changed and your original feasibility needs to be updated. Since the date of purchase you have obtained development approvals. Costs absorbed to date are as follows:
Year 1 - Holding costs $ 28,000 & Professional Fees $ 80,000
Year 2 - Holding costs $ 32,000, Professional Fees $ 40,000, DA application fees and Section 94 contribution $ 180,000
You are now ready to commence construction and anticipate the following cash flows to completion and sell out of the project.
Year 3 - Construction Costs $ 4,000,000, Holding Costs $ 36,000
Year 4 - Sales Revenue $ 9,800,000, Selling Costs $ 280,000
What would be the current anticipated Internal Rate of Return that would be reflected in the project ?
NOTE: Round your answer to 2 decimal places and do not include a % symbol
CFO (2,200,000)
CF1 ( 108,000)
CF2 ( 252,000)
CF3 (4,036,000)
CF4 9,520,000
COMP I/Y = 17.814
Net Present Value is the sum of all present values for a given cash flow series.
True or False
True
Each cash flow in the future has an equivalent Present Value amount (in todays dollars).
By adding up all the present value amounts for each cash flow amount which occurs in the future,
we can calculate the Net Present Value (NPV) for a given cash flow series.
Strictly speaking, the Discount Rate refers to the Desired Rate of Return.
True or False
True
We decide the discount rate we are going to use after consideration of the Risk Free Rate and the Risk Premium we need. Therefore it is the rate of return we need to get out of the project for us to be interested in taking on the project. We discount the forecast future cash flows back to today using the discount rate to work out how much we can afford to pay for the raw site / project.
Strictly speaking, the Internal Rate of Return (IRR) is the ACTUAL RATE of return we achieve on the money we used in a deal.
True or False
True
Whilst people often use the term IRR interchangeably with Discount Rate, you can not work out the IRR until you have put in a purchase price. The IRR tells you what rate of return you will achieve if you pay a specific price for the property (all other things going to plan or as forecasted).
The Discount Rate is generally determined by consideration of:
1) The Risk Free Rate (being the rate of return that could be achieved in a risk free investment over an equivalent period)
2) The Risk Premium (that is the additional return required to compensate for the additional perceived risk in the investment or development).
True or False
True
The Risk Free Rate would be for example the government bond rate for an equivalent time period (say 3 or 5 years rate). If we are going to do a property investment or development, we would consider what rate of return we can get simply by investing in say government bonds. We would then think about what additional returns we would need in order to take the additional risk of buying an investment property or doing a development. This additional return we require is called the Risk Premium. So if government bonds were paying 5% we would not be likely to invest in a property which returns 5%, we would probably want something more. How much more is the question. This will depend on how we see the risks that are inherent in the specific deal we are considering. The risk premium in property could be typically somewhere between 5 - 25% depending on the merits of a proposed investment / development.
Note that in some organisations the underpinning Risk Free Rate may be substituted by the Cost of Capital, being the cost of borrowing money from head office. This would probably only apply to very large organisations.
The Discount Rate is simply the rate of return that is required (on money invested today), for the purchase of cash flow amounts at given points of time in the future.
True or False
True
The discount rate is similar to an interest rate, except that we are talking about an amount in the future and trying to work out what it’s worth to us today. Therefore we need to determine what rate of return we want to achieve on the amount we invest today to purchase the likely future amount. Once we establish the discount rate we want to use, we simply de-compound the amount in the future at the chosen discount rate back to an equivalent amount in todays dollars (Present Value).
