Discounted Cash Flows

 

             Net Present Value of Discounted Cash Flows

 

             Discounted Cash Flows also known as Net Present Value of Discounted Cash Flows is a  

             valuation method which discounts future cash flows back to the present to estimate the  

             attractiveness of an investment. 

            

             Let's assume we are thinking about investing in an income producing property.  The

             discounted cash flow calculation would use the initial investment amount, a series of

             estimated yearly future after-tax cash flows, the after-tax sales proceeds in a given year

             and a discount rate determined by the investor.  The discount rate used by the investor

             reflects the investment risk and anticipated return required to take that risk or put

             simply, the investor enters the rate of return that he would like to make  on  the investment. 

             A negative net present value would indicate that the investment doesn't meet investor

             expectations.  A positive value indicates that the investment meets investor expectations. 

             The larger the net present value, the better the investment.

 

             Discounted Cash Flows - Example.  We have the following data for an income property that

             we are considering purchasing.  We would like to make 20% on our initial investment

             amount of $92,073.  We calculate a positive Net Present Value of 67,561 for the series 

             of estimated yearly after-tax Cash Flows and after-tax sales proceeds in year 10.

 

    Yearly After-Tax Cash Flows    After-Tax Sales Proceeds      Net Present Value

          1)  24,040                                                                                67,561
            

          2)  25,213
 

          3)  26,471
 

          4)  27,760
 

          5)  29,079


          6)  30,356


          7)  31,664


          8)  33,075


          9)  34,517


        10)  35,990                            10)  263,153

               

 

             A calculated Net Present Value of $67,561 tells us the following.  We are averaging at least     

             20% per year on our initial investment amount of $92,073.  Because we have a large net

             present value, this indicates that we are averaging quite a bit more than 20% per year on our

             investment.  The investment easily meets our financial requirements of a minimum 20% return. 

             It is a buy from a financial perspective.

 

             The discounted cash flow analysis to assist the

             investor in determining if an income producing property provides an adequate return.

             It is just one of many financial tools included in the our Property Analysis.  We will 

             provide an assortment of tools to assist the investor including an IRR (internal rate of

             return),  MIRR (modified internal rate of return), cash on cash return, cap rate, GRM

             (gross rent multiplier), break even point, debt coverage rato, and many more

 Tien and Jim 

Your Real Estate Partners