learncre.com - real estate 101 - tvm and cash flows 1
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TVM and Cash Flows
LearnCRE.comReal Estate Finance 101
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Sample Cash Flows
+ The following slides have various business plans, can you identify them?
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Business Plan 1
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Business Plan 2
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Business Plan 3
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Business Plan 4
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Business Plan 5
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Business Plan 6
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Business Plan 7
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Business Plan 8
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Business Plan 9
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What is TVM?
+ Time Value of Money
+ Present Value – Future amount of money that has been discounted to reflect its current
value
+ All money has interest earning potential
+ “A dollar today is worth more than a dollar tomorrow”
– A dollar today is worth more than a dollar tomorrow because the dollar can be invested
and earn a day's worth of interest, making the total accumulate to a value more than a
dollar by tomorrow.
+ Key Requirements for analysis:
– Principal or Cash Flow = amount
– Interest = rate for discounting or rate of interest earned
– Time = over what period or number of periods
+ BIG IDEA – TVM helps you evaluate the quality, risk, value of an investment
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Important Formulas
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Discount Rate
+ Discount Rate
– An interest rate used to discount future cash flows (DCF)
– “A stand-in to approximate risk”
– Investors would rather have cash immediately than having to wait and must therefore
be compensated by paying for the delay
– “Risk free rate or cap rate + growth + risk”
+ NPV – Net Present Value
– The total value of all future cash flows discounted back to today
– “How much is an investment worth?”
+ IRR – Internal Rate of Return
– The rate at which the Net Present Value is equal to 0%
– “An equivalent rate that describes the returns of irregular cash flows”
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Discount Rate Comparison
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IRR, 8%
Market Cap Rate, 6%
Discount Rate, 8%
Risk Free Rate, 1.91%
Risk Free Rate, 1.91%
Growth less Capex, 2%
Spread, 5.25%
Inflation Risk, 2%
Correct to 8%, 0.84%
Real Estate Risk, 3.00%
Sector Risk, 1.51%
IRR Cap Rate + Growth Discount Rate CPP Risk Asset Class Risk