Valuation - DCF

Question 1

What is DCF?

Answer 1

Discounted Cash Flow Technique (DCF)

A DCF valuation is a valuation model that seeks to determine the value of a property by examining its future net income or projected cash flow from the property and then discounting the cash flow to arrive at an estimated current value of the property

Question 2

What is IRR?

Answer 2

Internal Rate of Return (IRR)

It is a form of income approach valuation. The rate of return at which all future cashllowns. A DCF valuation is a valuation model that seeks to determine the value of a property by examining its future net income or projected cash flow from the property and then discounting the cash flow to produce a NPV of zero

Question 3

How to calculate IRR?

Answer 3

To calculate the IRR:
1. Input current market value as a negative cash flow
2. Input projected rents over holding period as a positive value
3. Input projected exit value at the end of the term assumed as a positive value
4. Discount rate (IRR) is the rate chosen which provides a NPV of Zero
5. If NPV is more than zero, then the target rate of return is met

Question 4

What is NPV?

Answer 4

Net Present Value (NPV)

A NPV can be used to determine if an investment gives a positive return against a target rate of return. When the NPV is positive, the investment has exceeded the investor’s target rate of return. When the NPV is negative, it has not achieved the investor’s target rate of return

Question 5

How to find the market value using DCF?

Answer 5

Simple methodology to find the market value:
1. Estimate the cash flow (income less expenditure) for an agreed holding period
2. Estimate the exit value at the end of the holding period
3. Select the discount rate
4. Discount cash flow at discount rate
5. Value is the sum of the completed discounted cash flow to provide the NPV