Discounted Cash Flow (DCF) Analysis with IRR and NPV
Originally published: 04/10/2016 16:41
Last version published: 02/05/2019 08:05
Publication number: ELQ-10246-4
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Discounted Cash Flow (DCF) Analysis with IRR and NPV

Several spreadsheets that can be used for the analysis of a real estate investment from various perspectives

The cash flow module includes the cash flow module inputs which provide the output summarized on the acquisition info, cash flow proforma for up to 10 years, sales proceeds and yields. The yields are provided as IRRs, internal rates of return. There is also a NPV, net present value page based upon a required rate of return and assuming a reasonable mortgage value as provided.

The IRR and NPV results are not realistic if the mortgage assumptions don't make sense. That is the analyst must be able to meet the objectives of the investor, lender, and tenants.

Investor objectives might include a target required rate of return, a given cash on cash return in the early or later years, a certain dollar NPV or other criteria.

Lender objectives might include a reasonable minimum DCR, debt coverage ratio, in the first year and beyond, and a reasonable LTV, loan to value ratio.

Tenant objectives are usually related to occupancy cost, minimizing the present value of occupancy but non- quantitative objectives may also come into play.

Developer objectives, not directly considered here, may be related to wealth creation where value exceeds costs.

If the investor is typical in terms of market parameters, such as tax rates, interest rates, LTV and required yields then the resulting values using discounted cash flow models should be similar to the values using the appraisal techniques. If they are not then the assumptions of one or the other don't make sense.

- Prof. Norm Miller, PhD, Jan 2011

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1 Excel Model Spreadsheet

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