L1_TMV

Question 1

DCF Analysis

What is it?
Two basic concepts:

Answer 1

Question 2

How do properties derive their value?

Residential

Answer 2

Question 3

How do properties derive their value?

Comercial

Answer 3

Question 4

Time Value of Money definition

Answer 4

Question 5

Present Value

Answer 5

Question 6

Future Value

Answer 6

Question 7

r1

Answer 7

Question 8

TMV FV e.g.

Answer 8

Question 9

Risk Adjusted Return vs Compound Return

Answer 9

Question 10

Multi-period compounding example

Answer 10

Question 11

Compounding over 3 years

Answer 11

Question 12

Generic form of future value using constant rate rT

Answer 12

Question 13

Present Value

Answer 13

Question 14

Discount Rate

Answer 14

Question 15

Discount Factor

Answer 15

Question 16

Discount Rate

Answer 16

Question 17

The discount rate for a property is theoretically composed of four factors:

Answer 17

1. Risk-Free Rate
   The base rate of return with no risk (usually proxied by long-term U.S. Treasury bonds).
   Represents the time value of money — what you’d earn if you invested in a completely risk-free asset.
2. Expected Inflation Premium
   Compensation for the expected loss of purchasing power over time.
   Ensures the return keeps up with rising prices.
3. Risk Premium
   Compensation for the uncertainty and risk associated with the property investment.
   Includes factors such as market risk, tenant risk, and potential volatility of property income and value.
4. Liquidity Premium
   Compensation for the fact that real estate is not as liquid as stocks or bonds — it takes time and cost to sell.
   Investors demand a higher return to account for this lack of liquidity.
   ✅ Formula (Conceptually):
   Discount Rate = Risk-Free Rate + Inflation Premium + Risk Premium + Liquidity Premium

Question 18

PV e.g.

Answer 18

Question 19

Multi-Period Discounting:
Two Year Present Value e.g.

Answer 19

Question 20

Discounting Over 3 Years:
Three Year Present Value e.g.

Answer 20

Question 21

Generic Form of Present Value Using a constant discount rate IT

Answer 21

Question 22

DCF Analysis

Trophy properties + Rational Agent

Answer 22

Question 23

Present Value of Cash Flows In More than One Future Year

Answer 23

Question 24

Discounted

Answer 24

Question 25

Unleveled Cash Flows

Answer 25

Question 26

Equity Value

Answer 26

Question 27

How do discount rates (r₁ through r₅) determine the present value of a property’s projected cash flows, including the terminal value at sale?

Answer 27

The table gives projected cash flows for Years 1–5. Year 5 includes both the property’s normal income (NOI) and its sale proceeds (terminal value/reversion). The note at the bottom reminds you that: You project future cash flows + sale value, Then discount them back using the appropriate discount rates for each year, To arrive at the property’s value today (NPV).

Question 28

NPV Calculation

Answer 28

The Net Present Value (NPV) of the property if all cash flows are discounted at the risk-free rate (4%), as if the project were completely safe and liquid like U.S. Treasury bonds.

Question 29

How is NPV calculated?

Answer 29

Question 30

Why is the total ($2,977,305) higher than if we had used a larger discount rate?

Answer 30

Because the lower the discount rate, the higher the present value. Using the risk-free rate assumes no risk premium, so the valuation is higher.

Question 31

What does this tell us about the role of the discount rate?

Answer 31

The choice of discount rate directly controls the valuation outcome. In reality, investors use higher discount rates (6–10% or more) to reflect risk, which lowers the NPV.

Question 32

Types of Real Estate project risks

Answer 32

Question 33

Why are different discount rates applied in this example?

Answer 33

Because not all years carry the same risk. The first two years are considered relatively safe (government lease in place), while later years are riskier due to lease expirations, uncertain operating conditions, and illiquidity at exit.

Question 34

What effect do higher discount rates have on valuation?

Answer 34

They lower the present value of future cash flows. Since later years are discounted at 15–20%, the NPV ($2,321,341) is much lower than under the flat 4% risk-free rate ($2,977,305).

Question 35

What does this tell us about investor behavior?

Answer 35

Investors demand higher returns to compensate for riskier, more uncertain cash flows further into the future. This raises the discount rate and decreases today’s valuation.

Question 36

Terminal Value

Answer 36

Question 37

Risk Premium

Answer 37

Question 38

Stabilized Property

Answer 38

Question 39

Stabilized NOI

Answer 39

Question 40

discount rate definition

Answer 40

the percentage you use to figure out how much future cash flows are worth right now. A higher discount rate means you are more cautious (or think the investment is riskier), so future cash flows are valued less today. A lower discount rate means you are more confident (or think the investment is safer), so you value future cash flows more today.