__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*