HW Quiz 1 Flashcards
In a discounted cash flow analysis, property value is evaluated using
Pre-tax cash flows: These unlevered cash flows allow you to calculate the value irrespective of the financing structure. This provides a value based solely on the performance of the property.
What tells you how much net value the investment is expected to create?
Net Present Value: NPV tells you how much net value the investment is expected to create (i.e., how much more the property is worth to you today than the costs of acquiring and/or developing it).
You should always choose the project that generates the highest NPV. (True or False)
False: NPV is simply another tool that should be used when considering different projects. One must keep in mind that there are many assumptions that go into the financial analysis that could be incorrect. You need to consider other factors such as how comfortable you are with your expertise in the market, whether one of the projects fits your expansion strategy better, or whether one has a safer downside if things go wrong, etc.
Discounted cash flow is premised upon which two basic concepts?
- A dollar received today is more valuable than a dollar received tomorrow.
- The only source of value for a property is its ability to generate future cash flows.
Discounted cash flow analysis postulates that the value of a property is equal to its expected future cash flows discounted to present dollars. Value in this context is referring to the monetary value that future cash flows provide which are the sole determinants of a property’s value. A dollar received today is more valuable than a dollar received tomorrow because you can invest money today to yield a positive return on the investment in the future.
The internal rate of return does NOT
-tell you about the size or timing of the expected cash flows
-comment on the length of the investment period
-distinguish between annual cash flows from operations and cash proceeds associated with exit
True or False: IRR is always the correct discount rate.
False: The IRR does not purport to be the correct discount rate. If you believe the appropriate discount rate for the project is lower than the IRR, the IRR math will return a positive NPV which is an indication of value creation.
Target levered IRR of core investments
7-9%
Target levered IRR of core-plus investments
9-12%
Target levered IRR of value-add investments
12-16%
Target levered IRR of opportunistic investments
16%+
Which of the investment profiles is the highest risk?
Opportunistic
Which of the investment profiles contains the lowest risk?
Core
If the 10-year Treasury rate is at 6% and an illiquidity premium of 1% is appropriate for real estate risk, what is the present value of a technology firm that does 90% of its work for the government and has the following cash flows (assume we are at Time 0):
Year 1: $75
Year 2: $68
Year 3: $71
Year 4: $80
Year 5: $89
Year 6: $100
Year 7: $1,200
Discount rate is likely higher than 7% because there are other risks associated with this real estate investment.
a) $1,125.87 (if discount rate is 6%+1%=7%)
b) None <– correct
c)$1,222.01
d) $1,189.33
How are the discount rate and value of an investment property correlated?
The discount rate and value of an investment property are inversely correlated.
As the equity owner, if you think the risks are minimal and you are certain that you will never sell the building, then you do not require a high discount rate which will impute a higher value for the investment property. (i.e. low risk = high value, high risk = low value)
The Present Value of Money: $100.00;
Growth Rate at Year 1 is assumed to be 3.9%;
Growth Rate at Year 2 is assumed to be 3.9%;
Growth Rate at Year 3 is assumed to be 3.9%.
Assuming now the Growth Rate at Year 3 is 5% and other inputs are unchanged, what is the Value at the End of Year 3? Please round to the nearest hundredth place.
$113.35
