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Introduction to Discounted Cash Flow Analysis

Introduction to Discounted Cash Flow Analysis. by James R. DeLisle, Ph.D. March 18, 2014. Lecture Preview. DCF Prelude: Frontdoor /Backdoor. The Value Proposition: Value => Cost?. Value ??. Value = Income Rate. Land & Hard Costs. Known Soft Costs & Fee Costs.

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Introduction to Discounted Cash Flow Analysis

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  1. Introduction to Discounted Cash Flow Analysis byJames R. DeLisle, Ph.D.March 18, 2014

  2. Lecture Preview

  3. DCF Prelude: Frontdoor/Backdoor

  4. The Value Proposition: Value => Cost? Value ?? Value = Income Rate Land & Hard Costs Known Soft Costs & Fee Costs $’s Cost = Create Value Unknown Fees TRCm TRCm = Total Replacement Cost market

  5. FD/BD Value Proposition: Cost < >Value ? Value * Rate = Income User Value * Rate Income Frontdoor Backdoor Value<= Income Rate Value * Rate => Income

  6. Frontdoor Model: Sequence TRCm * Wcc GIr NIr / NIR Land Hard & Soft Costs NIR = 1 – (Er + Ptx + Vr) TRCm

  7. Backdoor Model: Reverse Engineered TRCj /Wcc GIm / NIR NIm Land NIR = 1 – (Er + Ptx + Vr) Hard & Soft Costs TRCj

  8. M a r k e t Backdoor to Unleveraged DCF Analysis TRCm / Wcc GIm * NIR NIm Land Hard & Soft Costs TRCm

  9. Frontdoor/Backdoor vs. DCF Frontdoor/Backdoor Discounted Cash Flow Non-annuitized Leveraged/Unleveraged Present Value (TVM) After-tax After Sale • Annuitized • Leveraged/Unleveraged • Constant Dollars • Before Tax • Before Sale

  10. DCF Models: A Visual Perspective

  11. Equity Justified: PV of CF + PV Net Reversion PV CF + NIr GIr

  12. Net Reversion Sales Price - Sales Exp Net Sales Price CG Appr x 15% Appreciation TRCm Land Value Depreciation CG Depr x 25% Mortgage Amortization Net Reversion Stabilized NOI Pb NIr GIr

  13. Equity Justified: PV of CF + PV Net Reversion - Sales Exp - Tax on Sale - Mtg. Bal. Sales Price = Ej Net Reversion PV NR PV CF + NIr GIr

  14. Cash Flow: The One Key Word GI NI TI BT AT NR Gross Income Net Income Taxable Income Before Tax Cash Flow After Tax Cash Flow Net Reversion

  15. DCF Case Study:Inputs and Schedules

  16. DeprLife 39 CGTxR 15.00% CGTxV 25.00% Selling Expense Exit Cap Rate Cash Flow Variables and TRC/FD/BD Inputs

  17. Discounted Cash Flow and Financial Ratios • Schedule I: Cash Flow • Schedule II: Depreciation • Schedule III: Loan Amortization • Schedule IV: Net Reversion • Schedule V: Capital Gain Tax • Schedule VI: Financial Ratios

  18. Schedule I: Cash Flow Overview

  19. Schedule I: Cash Flow Overview

  20. Schedule I: GI to NI

  21. Schedule II: Depreciation $3,436,567*(1/39) = $88,117

  22. Schedule III: Loan Amortization Calculate Payment Calc. Principal Balance Calc. Prin. Reduction Calc. Interest

  23. Schedule III(b): Loan Amortization

  24. DCF: NI to BTCF

  25. Schedule I: BTCF to ATCF If TI > 0, -TI * MtxR If TI < 0, TI * MtxR

  26. Schedule IV-V: CGTaxes on Sale & AT Proceeds Schedule IV: AT Proceeds Schedule V: Capital Gain Tax On Sale If, CapGain * 15% AccDepr * 25%

  27. Schedule I: Cash Flow 1- 10

  28. Introduction to DCF Ratios:Key Financial Indicators

  29. Schedule VI: Financial Ratios

  30. Schedule VI: Financial Ratios

  31. DCR: 1.3 Target Debt Coverage Ratio • Interpretation • DCR provides a measure of the safety of the mortgage position, indicates the cushion between required payments and NOI. • DCR’s should normally be 1.2 or more • Equation

  32. Lecture Review

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