"? ? USB242Experience PropertyWeek 10? Introduction to Discounted Cash Flow Valuation ? Elements of a DCF o Net cash flows o Escalation factorso Holding period o Terminal value o Discount rateo Internal Rate of Return (IRR) ? Sensitivity Analysis?Introduced in 1990’s ?An alternative approach to valueinvestment properties. ?Used in valuation and also in feasibilityanalysis. ?All assumptions are explicit and can bechanged. ?The DCF method lends itself to “sensitivityanalysis”.?Frequent use of proprietary systems – (Dyna, Cougar)?More accepted by the property industrythan it was historically (15-20 years ago).Any resistance is largely due to theforecasting of cash flows over an extendedperiod and the selection of an appropriatediscount rate.Valuation: ?The NPV is the valuation figure. ?Acquisition costs must be deducted. Feasibility Studies: ?A projects viability can be assessed usingDCF by determining whether all theprojected costs and benefits discounted atthe target rate of return (hurdle rate) result ina positive NPV. For Analysis: ? Where the purchase price, cash flow and saleprice are known, utilise DCF method tocalculate IRR.Key reporting metric forperformance for asset managers. ? Where purchase price and cash flow are knownforecast holding period IRR.Target IRR ? Compare and contrast alternative assetstrategies? Point forward returns 3, 5, & 10 year holdingperiods? Redevelop vs Sell?DCF looks at current and future cash flows(positive and negative) and brings thenback to a present value. ?This requires projections of future incomesand costs which are influenced by manyfactors.?Both Capitalisation and DCF are focusedon accurately establishing a net incomefigure and converting that to a capital sum. ?Capitalisation uses a market derivedCapitalisation Rate with implicit growthand risk assumptions."