DCF Technique Flashcards
What is explicit in this method?
Growth
DCF is used for valuations where the projected cash flows are explicitly estimated over a limited period. Give examples.
Short leasehold interests
Properties with income voids
Phased development projects
Non-standard investments (say with 21 year rent reviews)
Over rented properties
Investment analysis - calculation of worth to assist in buy/sell decisions or selection between available investments
What does the approach separate out and explicitly identify?
Growth assumptions (rather than incorporating into an ARY)
What is the benefit of the DCF technique?
Takes into account timing of cash flows and builds growth explicitly into the calculation.
What is the RICS guidance note on DCF?
Discounted cash flow for commercial property investments, 2010
What is the sum of the discounted cash flows of the project?
Net Present Value (NPV)
What can be used to determine if an investment gives a positive return against a target rate of return?
NPV
What is the NPV when an investment has exceeded an investor’s tater rate of return?
Positive
What happens to the NPV when the investment has not achieved the investor’s target rate of return?
Negative
What is the rate of interest at which all future cash flows must be discounted to produce an NPV of 0?
IRR
What is the IRR used to assess?
The total return making some assumptions regarding rental growth. re-letting and exit assumptions.
What can be used is the valuer does not have a software programme to calculate the IRR?
Linear interpolation
What is the methodology for finding the market value?
- Estimate cash flow (income less expenditure)
- Select the discount rate.
- Discount the cash flow using the rate.
- Value os the sum of the completed cash flow (to provide the NPV)
How is the IRR calculated?
- Input current MV as a negative cash flow.
- Input projected rents over holding period.
- Input projected exit value at end of term.
- Discount rate (IRR) is the rate chosen which provides an NPV of 0.
