Discounted Cash Flows

Question 1

What is the most accurate rate of return calculation?

Answer 1

IRR (Time weighted average return)

Question 2

In Real Estate the term Exogenous relates to what?

Answer 2

exogenous - growing or originating from outside a system. In real estate when within the context of capitalization rates, future cash flows of an asset are determined by factors that are independent of how much you pay for the asset.

Question 3

How are real estate investments unique from other asset classes?

Answer 3

The price investors pay for the assets determines their expected returns because income is independent of price paid.

Question 4

What is a cap rate?

Answer 4

expected return on assets. Cap Rate = income/price

Question 5

Answer 5

Question 6

What is a pro-forma?

Answer 6

Schedule of cash inflows and outflows through the life of a project formulated under specific and explicit assumptions.

Question 7

What are the three types of cash flows?

Answer 7

1-From Operations

2-From Investing Activites

3-From Financing Activites

Question 8

What are the five components of a Financial Anaylsis?

Answer 8

1- Simple cap of pro forma NOI reaches stabilization

2- DCF anayliss of annual cash flows during stabilzied operating period.

3-Combined analysis of the development & operating periods.

4-Monthly cash flows during the development period.

5-DCF Anaylsis for investors.

Question 9

What are the 3 cash flows in a pro-forma?

Answer 9

1. Cash Flow from Operations
2. Cash Flow from Investing
3. Cash Flow from Financing

Question 10

What is DCF?

Answer 10

Discounted cash flow: Single most important quantification in micro-level RE

1. Forecast the expected future cash flows
2. Ascertain the required total return
3. Discount the cash flows to present value at the required rate of return.

Question 11

Reversion cash flows

Answer 11

Expected cash flow from the resale of porperty.

Question 12

Empirical cap rates

Answer 12

Market driven cap rate used for estimations of value.

Question 13

NPV

Answer 13

Net Present Value -The present dollar value of what is being obtained (benefit) minus the present dollar value of what is being given up (cost).

Question 14

NPV Investment Decision Rule

Answer 14

1. Maximize the NPV across all mutually exclude alternatives
2. Never choose an alternative that has NPV <0.

Question 15

Hurdle Rate Investment Rule

Answer 15

1. maximize the difference between the project’s expected IRR and the required return.
2. Never do a deal with an expected IRR less than the required return.

Question 16

What are the 3 components of a pro-forma?

Answer 16

1. Cash Flows
2. Schedule
3. Finanical Metrics

Question 17

How are Stage 1 Simple Capitlization and Stage 2 Discounted Cash Flow?

Answer 17