TVM Basics

Question 1

What does Discounted Cash Flow (DCF) analysis postulate?

Answer 1

The value of a property equals its expected future cash flows discounted to present dollars.

Question 2

What are the two key assumptions of DCF?

Answer 2

(1) The only source of value is the property’s ability to generate cash flows.
(2) A dollar today is more valuable than a dollar tomorrow.

Question 3

How do residential properties derive value?

Answer 3

From expected future cash flows, such as rents and resale potential.

Question 4

What happened with office stocks in 2020?

Answer 4

Shareholders priced in the impact of remote work before private market sales declined.

Question 5

How do commercial and multifamily properties derive value?

Answer 5

From expected future cash flows.

Question 6

Should all cash flows be valued equally?

Answer 6

No, they must be discounted.

Question 7

What is the Time Value of Money?

Answer 7

Money today is worth more than the same nominal amount in the future.

Question 8

Why?

Answer 8

Because money today can be invested to earn returns.

Question 9

What is Present Value (PV)?

Answer 9

The current value of a future amount discounted at an appropriate rate.

Question 10

What is Future Value (FV)?

Answer 10

The expected worth of money today at a future date.

Question 11

If CF0 = $100 and r = 4%, what is FV in Year 1?

Answer 11

$104.

Question 12

What does r1 represent?

Answer 12

The required return in Year 1.

Question 13

What is Risk-Adjusted Return?

Answer 13

A PV that accounts for risk in the cash flow stream.

Question 14

What is Compound Return?

Answer 14

The cumulative effect of reinvested returns on capital.

Question 15

What does compounding mean?

Answer 15

Earning returns on prior returns.

Question 16

If CF0 = $100 and r = 4.5%, FV after 2 years = ?

Answer 16

$109.20.

Question 17

If r = 3.9%, FV after 3 years?

Answer 17

$112.16.

Question 18

What is CF1 at Year 1?

Answer 18

$103.90.

Question 19

General formula for FV at constant rate r?

Answer 19

CF0 × (1 + r)^T.

Question 20

What exponent is used in the second-to-last period?

Answer 20

T – 1.

Question 21

Can time periods be months instead of years?

Answer 21

Yes, but cash flows and rates must be consistent.

Question 22

If using months, what must match?

Answer 22

Monthly cash flows with monthly rates.

Question 23

What is a Discount Rate?

Answer 23

The required annual return to discount cash flows.

Question 24

What is a Discount Factor?

Answer 24

(1 + r)^-1.

Question 25

What four factors make up the discount rate?

Answer 25

Risk-free rate, expected inflation, NOI risk premium, illiquidity premium.

Question 26

What proxies the risk-free rate?

Answer 26

10-year U.S. Treasury yield.

Question 27

If FV = $104 at 4% discount, PV = ?

Answer 27

$100.

Question 28

What is the discount factor at 4%?

Answer 28

0.9615.

Question 29

FV = $109.20, r = 4.5%, T=2. PV = ?

Answer 29

$100.

Question 30

Discount factor at 4.5% for 2 years?

Answer 30

0.916.

Question 31

FV = $112.16 at r=3.9%, T=3. PV = ?

Answer 31

$100.

Question 32

Generic PV formula?

Answer 32

CFT ÷ (1 + r)^T.

Question 33

What is the general form of PV?

Answer 33

CFT ÷ (1 + r)^T.

Question 34

Why is it important?

Answer 34

It shows how future amounts are discounted to today.

Question 35

What is cumulative PV?

Answer 35

The sum of individual PVs.

Question 36

If CFs = 104, 109.2, 112.16, what is total PV?

Answer 36

$300.

Question 37

What does discounted mean?

Answer 37

Future cash flows are worth less than par today.

Question 38

What was the discount percentage in the example?

Answer 38

8.45%.

Question 39

What are Unlevered Cash Flows?

Answer 39

Property-level cash flows before financing.

Question 40

What is Equity Value?

Answer 40

Property value minus liabilities.

Question 41

What is NPV formula?

Answer 41

NPV = Σ CFt ÷ (1 + rt)^t.

Question 42

PV of cash flows with r=4%?

Answer 42

$2,977,305.

Question 43

What if property is riskless?

Answer 43

Discount using constant risk-free rate.

Question 44

What is the total NPV in that case?

Answer 44

$2,977,305.

Question 45

Name key real estate project risks.

Answer 45

Liquidity, operating, political, lease-up, tenant credit, market.

Question 46

Is discount rate determination exact?

Answer 46

No, it requires judgment.

Question 47

What happens if early years are low-risk but later years are risky?

Answer 47

PV decreases due to higher discount rates in later years.

Question 48

What was NPV with varied discount rates?

Answer 48

$2,321,341.

Question 49

What is Terminal Value?

Answer 49

Estimated sale value of a property.

Question 50

How is it estimated?

Answer 50

Cap rate applied to stabilized NOI.

Question 51

What is a Stabilized Property?

Answer 51

One at full occupancy (with normal vacancy) and steady NOI growth.

Question 52

What is Stabilized NOI?

Answer 52

Net operating income after expenses with steady growth.