Introduction to Discounted Cash Flow Analysis by James
Introduction to Discounted Cash Flow Analysis by James R. De. Lisle, Ph. D. March 18, 2014 © JR De. Lisle, Ph. D.
Lecture Preview DCF Prelude • The Value Proposition • Frontdoor/Backdoor Models Introduction to Discounted Cash Flow • DCF: A Visual Overview • One Word: Gi. Ni. Ti. Bt. At. NR • Basic Inputs DCF Schedules • Schedule 1: Pro Forma Cash Flow • Schedules II-III: Depreciation and Loan Amortization • Schedules IV-V: Capital Gain Taxes and Net Reversion • Schedules VI: Financial Ratios © JR De. Lisle, Ph. D.
DCF PRELUDE: FRONTDOOR/BACKDOOR
The Value Proposition: Value => Cost? Value ? ? Value = Income Rate Land & Hard Costs Known Soft Costs & Fee Costs $’s Cost = Create Value Unknown Fees TRCm = Total Replacement Cost market © JR De. Lisle, Ph. D.
FD/BD Value Proposition: Cost < >Value ? Value * Rate = Income User Value * Rate Income Frontdoor Value * Rate => Income © JR De. Lisle, Ph. D. Backdoor Value <= Income Rate
Frontdoor Model: Sequence TRCm * Wcc GIr NIr / NIR Land Hard & Soft Costs TRCm © JR De. Lisle, Ph. D. NIR = 1 – (Er + Ptx + Vr)
Backdoor Model: Reverse Engineered TRCj / Wcc GIm NIm / NIR Land NIR = 1 – (Er + Ptx + Vr) Hard & Soft Costs TRCj © JR De. Lisle, Ph. D.
Backdoor to Unleveraged DCF Analysis Market TRCm / Wcc GIm NIm Land Hard & Soft Costs TRCm © JR De. Lisle, Ph. D. * NIR
Frontdoor/Backdoor vs. DCF Frontdoor/Backdoor Discounted Cash Flow • Annuitized • Non-annuitized • Leveraged/Unleveraged • Constant Dollars • Present Value (TVM) – Before Tax – Before Sale – After-tax – After Sale
DCF MODELS: A VISUAL PERSPECTIVE
PV CF + Equity Justified: PV of CF + PV Net Reversion NIr © JR De. Lisle, Ph. D. GIr
Net Reversion Sales Price TRCm Net Sales Price - Sales Exp Appreciation CG Appr x 15% Land Value Depreciation Mortgage CG Depr x 25% Amortization Net Reversion Pb Stabilized NOI NIr © JR De. Lisle, Ph. D. GIr
Equity Justified: PV of CF + PV Net Reversion = Ej Sales Price - Sales Exp - Tax on Sale - Mtg. Bal. PV CF + PV NR Net Reversion NIr © JR De. Lisle, Ph. D. GIr
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 © JR De. Lisle, Ph. D.
DCF CASE STUDY: INPUTS AND SCHEDULES
Cash Flow Variables and TRC/FD/BD Inputs Depr. Life CGTx. R CGTx. V © JR De. Lisle, Ph. D. 39 15. 00% 25. 00% Selling Expense Exit Cap Rate Real Estate Fundamentals
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 © JR De. Lisle, Ph. D.
Schedule I: Cash Flow Overview © JR De. Lisle, Ph. D.
Schedule I: Cash Flow Overview © JR De. Lisle, Ph. D.
Schedule I: GI to NI © JR De. Lisle, Ph. D.
Schedule II: Depreciation $3, 436, 567*(1/39) = $88, 117 © JR De. Lisle, Ph. D.
Schedule III: Loan Amortization Calculate Payment Calc. Principal Balance Calc. Prin. Reduction © JR De. Lisle, Ph. D. Calc. Interest
Schedule III(b): Loan Amortization © JR De. Lisle, Ph. D.
DCF: NI to BTCF © JR De. Lisle, Ph. D.
Schedule I: BTCF to ATCF © JR De. Lisle, Ph. D. If TI > 0, -TI * Mtx. R If TI < 0, TI * Mtx. R Real Estate Fundamentals
Schedule IV-V: CGTaxes on Sale & AT Proceeds Schedule IV: AT Proceeds Schedule V: Capital Gain Tax On Sale If, Cap. Gain * 15% Acc. Depr * 25% © JR De. Lisle, Ph. D.
Schedule I: Cash Flow 1 - 10 © JR De. Lisle, Ph. D.
INTRODUCTION TO DCF RATIOS: KEY FINANCIAL INDICATORS
Schedule VI: Financial Ratios © JR De. Lisle, Ph. D.
Schedule VI: Financial Ratios © JR De. Lisle, Ph. D.
© JR De. Lisle, Ph. D. 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 DCR: 1. 3 Target Real Estate Fundamentals
Lecture Review DCF Prelude • The Value Proposition • Frontdoor/Backdoor Models Introduction to Discounted Cash Flow • DCF: A Visual Overview • One Word: Gi. Ni. Ti. Bt. At. NR • Basic Inputs DCF Schedules • Schedule 1: Pro Forma Cash Flow • Schedules II-III: Depreciation and Loan Amortization • Schedules IV-V: Capital Gain Taxes and Net Reversion • Schedules VI: Financial Ratios © JR De. Lisle, Ph. D.
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