by James R DeLisle PhD March 18 2014 Lecture Preview DCF Prelude Frontdoor Backdoor The Value Proposition Value gt Cost Land amp Hard Costs Unknown Fees Known Soft Costs ID: 390251
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Slide1
Introduction to Discounted Cash Flow Analysis
by
James R. DeLisle, Ph.D.
March 18, 2014Slide2
Lecture PreviewSlide3
DCF Prelude: Frontdoor/BackdoorSlide4
The Value Proposition: Value => Cost?
Land & Hard
Costs
Unknown Fees
Known Soft Costs
& Fee Costs
TRCm
Value =
Income
Rate
$’s Cost = Create Value
Value ??
TRCm
= Total Replacement Cost
marketSlide5
FD/BD Value Proposition: Cost < >Value ?
Value * Rate = Income
Value
* Rate
Income
Frontdoor
Value * Rate =>
Income
Value
<=
Income
Rate
Backdoor
UserSlide6
Frontdoor Model: Sequence
Land
Hard & Soft Costs
TRCm
TRCm
NIr
* Wcc
/ NIR
GIr
NIR = 1 – (Er + Ptx + Vr)Slide7
Backdoor Model: Reverse Engineered
Land
Hard & Soft Costs
TRCj
TRCj
NIm
/
Wcc
/ NIR
GIm
NIR = 1 – (Er + Ptx + Vr)Slide8
Backdoor to Unleveraged DCF Analysis
Land
Hard & Soft Costs
TRCm
TRCm
NIm
/ Wcc
* NIR
GIm
M
a
r
k
e
tSlide9
Frontdoor/Backdoor vs. DCF
Frontdoor
/Backdoor
Annuitized
Leveraged/Unleveraged
Constant Dollars
Before Tax
Before Sale
Discounted Cash FlowNon-annuitized
Leveraged/UnleveragedPresent Value (TVM)
After-taxAfter SaleSlide10
DCF Models: A Visual PerspectiveSlide11
Equity Justified: PV of CF + PV Net Reversion
NIr
GIr
PV CF +Slide12
Net Reversion
TRCm
NIr
GIr
Stabilized
NOI
Sales Price
- Sales
Exp
Net Reversion
Appreciation
Land Value
Depreciation
Amortization
Mortgage
CG
Appr
x
15%
CG Depr
x 25%
Pb
Net Sales PriceSlide13
Equity Justified: PV of CF + PV Net Reversion
= Ej
NIr
GIr
Sales Price
- Sales Exp
- Tax on Sale
- Mtg. Bal.
Net Reversion
PV CF +
PV NRSlide14
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 ReversionSlide15
DCF Case Study:Inputs and SchedulesSlide16
Cash Flow Variables and TRC/FD/BD Inputs
Selling Expense
Exit Cap Rate
DeprLife
39
CGTxR
15
.00%
CGTxV
25.00%Slide17
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 RatiosSlide18
Schedule I: Cash Flow OverviewSlide19
Schedule I: Cash Flow OverviewSlide20
Schedule I: GI to NISlide21
Schedule II: Depreciation
$3,436,567*(1/39) = $88,117Slide22
Schedule III: Loan Amortization
Calculate Payment
Calc. Principal Balance
Calc. Prin.
Reduction
Calc. InterestSlide23
Schedule III(b): Loan AmortizationSlide24
DCF: NI to BTCFSlide25
Schedule I: BTCF to ATCF
If TI > 0, -TI * MtxR
If TI < 0, TI * MtxRSlide26
Schedule IV-V: CGTaxes on Sale & AT Proceeds
Schedule IV: AT Proceeds
Schedule V: Capital Gain Tax On Sale
If,
CapGain
*
15%
AccDepr * 25%Slide27
Schedule I: Cash Flow 1- 10Slide28
Introduction to DCF Ratios:Key Financial IndicatorsSlide29
Schedule VI: Financial RatiosSlide30
Schedule VI: Financial RatiosSlide31
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 TargetSlide32
Lecture Review