Draft: June 9, 2005 Discounted Cash Flow Analysis with IRR and NPV

This workbook contains several spreadsheets that might be used fo the analysis of a real estate investment from various persp
The cash flow module includes the cash flow module inputs which provide the output summarized on the acquisition info, cash
for up to 10 years, sales proceeds and yields. The yields are provided as IRRs, internal rates of return. There is also a NPV, n
page based upon a required rate of return and assuming a reasonable mortgage value as provided.
The IRR and NPV results are not realistic if the mortgage assumptions don't make sense. That is the analyst must be able to
objectives of the investor, lender, and tenants.

Investor objectives might include a target required rate of return, a given cash on cash return in the early or later years, a certa
Lender objectives might include a reasonable minimum DCR, debt coverage ratio, in the first year and beyond, and a reasona
Tenant objectives are usually related to occupancy cost, minimizing the present value of occupancy but non- quantitative objec
Developer objectives, not directly considered here, may be related to wealth creation where value exceeds costs.

If the investor is typical in terms of market parameters, such as tax rates, interest rates, LTV and required yields then the resul
flow models should be similar to the values using the appraisal techniques. If they are not then the assumptions of one or the
FIRST: You must enable Macros!
Seond: You may need to go to "Tools" and protection and unprotect any sheet you are working on in order to do editing.
The IRR is on the "yield" worksheet in cell J121.
The first year debt coverage ratio is in the "cash flow proforma" in cell D26.

What is the property worth if you need an IRR of 15.24% and debt coevrage ratio of 1.2 in the first y

real estate investment from various perspectives.

summarized on the acquisition info, cash flow proforma
nal rates of return. There is also a NPV, net present value
e as provided.
nse. That is the analyst must be able to meet the

h return in the early or later years, a certain dollar NPV or other criteria.
he first year and beyond, and a reasonable LTV, loan to value ratio.
of occupancy but non- quantitative objectives may also come into play.
where value exceeds costs.

s, LTV and required yields then the resulting values using discounted cash
e not then the assumptions of one or the other don't make sense.

e working on in order to do editing.

coevrage ratio of 1.2 in the first year?

Investor Assumptions
1.
2.
3.
4.
5.
6.

Tax Rate on Ordinary Income

Tax Rate on Capital Gains
Tax Rate on Cost Recovery Recapture
Projected Holding Period
EOY 10 Resale Price Cap Rate (Uses 11th Year NOI or $ Amount) Ex. Enter 10% here as 10.0

Disposition Cost of Sale

34.00%
Lightly Shaded
15.00%
Cells are Input Cells
25.00%
10
10.00%
$760,566
7.00% IN the cell C11 to the lower left

7
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.

Purchase Price (Acquisition Cap Rate or $ Amount)

Acquisition Costs
Improvement Allocation
Useful Life
Year 1 Potential Rental Income/Constant Annual Growth Rate
Constant Vacancy Rate (Ex: Enter 5% here as .05)
Property Management Expense (% of Effective Rental Income)
Year 1 Property Taxes/Constant Annual Growth Rate
Year 1 Property Insurance/Constant Annual Growth Rate
Year 1 Repairs and Maintenance/Constant Annual Growth Rate
Year 1 Accounting and Advertising/Constant Annual Growth Rate

18.
19.
20.
21.
22.
23.

Calculation of Loan Amount (% of Purchase Price, DCR, or Loan Amount)

Interest Rate (Enter as decimal form, .08 = 8.0%)
Amortization Period
Term
Payments Per Year
Loan Costs (% of Loan Amount or $ Amount)

24.
25.
26.
27.
28.
29.
30.

Projected Year of Refinance (EOY)

Calculation of Loan Amount (% of Value,DCR, or Loan Amount)
Interest Rate
Amortization Period
Term
Payments Per Year
Loan Costs (% of Loan Amount or $ Amount)

650,000.00
$0
80.00%
27.5
$90,000
5.00%
8.00%
$8,926
$2,437
$10,560
$1,200

you change the purchase price

$650,000

3.00%

2.00%
2.00%
3.00%
3.00%

Acquisition Financing Assumptions

80.00
8.25%
25
25
12
1.00

$520,000

Clear

Refinance Assumptions
0
0.00
0.00%
25
25
12
0.00

Net Present Value Analysis Assumptions for Valuation

31 Required Rate of Return After Tax

12.50%

$0

Lightly Shaded
Cells are Input Cells

N the cell C11 to the lower left

ou change the purchase price

Clear

Acquisition Information Sum

Property Information
Purchase Price
Acquisition Costs
Acquisition Cap Rate
Initial Investment
Cost Recovery Value of Improvements
Useful Life
11 1/2 Month Year Cost Recovery Deduction
Full Year Cost Recovery Deduction
Disposition Cap Rate
Projected End of Year 10 Sale Price
Projected End of Year 10 Cost of Sale

Financing Information
Acquisition
Projected Year of Refinance (End of
Year)
Loan Amount
Interest Rate
Payments Per Year
Periodic Payment
Annual Debt Service
Amortization Period
Term
Loan Costs
Effective Cost of Borrowed Funds

N/A
$520,000
8.25%
$4,099.94
$49,199

$5,200
8.41%

Property Information
Purchase Price
Acquisition Costs
Acquisition Cap Rate
Initial Investment
Cost Recovery Value of Improvements
Useful Life
11 1/2 Month Year Cost Recovery Deduction
Full Year Cost Recovery Deduction
Disposition Cap Rate
Projected End of Year 10 Sale Price
Projected End of Year 10 Cost of Sale

$650,000
$0
8.54%
$135,200
$520,000
27.5
$18,122
$18,907
10.00%
$760,566
$53,240

Acquisition Financing Information

Loan Amount
Interest Rate
Payments Per Year
Periodic Payment
Annual Debt Service
Amortization Period
Term
Loan Costs
Effective Cost of Borrowed Funds

$520,000
8.25%
12
$4,099.94
$49,199
25
25
$5,200
8.41%

Refinance Information
Projected Year of Refinance (End of Year)
Loan Amount
Interest Rate
Payments Per Year
Periodic Payment
Annual Debt Service
Amortization Period
Term
Loan Costs
Effective Cost of Borrowed Funds

0
$0
0.00%
12
$0.00
$0
25
25
$0
0.00%

Initial Investment
Cost Recovery Value of Improvements
11 1/2 Month Year Cost Recovery %age
Full Year Cost Recovery %age

Year of Refinance (EOY)

Refinance Loan Amount

$135,200
$520,000
3.485%
3.636%
2.457%
2.564%

ation Summary

ents

Deduction

e
ale

$650,000
$0
8.54%
$135,200
$520,000
27.5
$18,122
$18,907
10.00%
$760,566
$53,240

Acquisition
N/A
$520,000
8.25%
12
$4,099.94
$49,199
25
25
$5,200
8.41%

Refinance
0
$0
0.00%
12
$0.00
$0
25
25
$0
0.00%

1
2
3
4
5
6
7
8
9
10

1
2
3
4
5
6
7
8
9
10

$1,000
($990)
$987.42
$973.76
$958.92
$942.82
$925.34
$906.36
$885.75
$863.38
$839.09
$812.72
$1,000
($1,000.00)
balance
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00
$0.00

$7.88
9.31%
8.80%
8.64%
8.55%
8.50%
8.47%
8.45%
8.43%
8.42%
8.41%
$0.00

0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%
0.00%

END OF YEAR
1. POTENTIAL RENTAL INCOME

$90,000

$92,700

$95,481

$98,345

$4,500

$4,635

$4,774

$4,917

3. EFFECTIVE RENTAL INCOME

$85,500

$88,065

$90,707

$93,428

4. Less: Operating Expenses

5.
Management
6.
Property Taxes
7.
Property Insurance
8.
Maintenance & Repairs
9.
Accounting & Advertisin

$6,840
$8,926
$2,437
$10,560
$1,200

$7,045
$9,105
$2,486
$10,877
$1,236

$7,257
$9,287
$2,535
$11,203
$1,273

$7,474
$9,472
$2,586
$11,539
$1,311

$55,537

$57,317

$59,152

$61,045

11. Less: Interest

$42,656
12.
Cost Recovery
$18,122
13.
Loan Costs Amortization
$208

$42,095
$18,907
$208

$41,487
$18,907
$208

$40,826
$18,907
$208

14. TAXABLE INCOME

($5,449)

($3,894)

($1,450)

15. Times Tax Rate

16. Tax Liability (Savings)

34.00%
($1,853)

34.00%
($1,324)

34.00%
($493)

17. NET OPERATING INCOME

$55,537

$57,317

$59,152

$61,045

18. Less: Annual Debt Service

19.
Capital Contributions

$49,199
$0

$49,199
$0

$49,199
$0

$49,199
$0

$6,338

$8,117

$9,953

$11,846

($1,853)

($1,324)

$8,190

$9,441

$10,446

$11,470

1.13

1.16

1.20

1.24

2. Vacancy Loss

10. NET OPERATING INCOME

20. CASH FLOW BEFORE TAX

21. Less: Tax Liability
22. CASH FLOW AFTER TAX
23. Debt Coverage Ratio

($493)

$1,104
34.00%
$375

$375

24. Breakeven Occupancy Percent

87.96%

86.24%

84.58%

82.96%

25. Expense Ratio

35.04%

34.92%

34.79%

34.66%

26. Before Tax Cash on Cash

4.69%

6.00%

7.36%

8.76%

27. Return on Asset

8.54%

8.82%

9.10%

9.39%

28. After Tax Cash on Cash

6.06%

6.98%

7.73%

8.48%

29. EOY Balance (Acquisition Loan $513,457

$506,353

$498,641

$490,268

$0

$0

$0

$0

31. Property Value (Acquisition CR $670,830

$692,311

$714,464

$737,310

30. EOY Balance (Refinanced Loan

32.

33.

$42,656

$42,095

$41,487

$40,826

$4,099.94
$49,199
$42,656
$513,457
$5,200
$208
$4,992

$4,099.94
$49,199
$42,095
$506,353
$4,992
$208
$4,784

$4,099.94
$49,199
$41,487
$498,641
$4,784
$208
$4,576

$4,099.94
$49,199
$40,826
$490,268
$4,576
$208
$4,368

Acquisition Loan
$520,000
Payment
ADS
Interest
Balance
Loan Costs
Annual LC Amortization
Unamortized Loan Costs

Refinance Loan
Refinance Proceeds
Loan Amount

1
$513,457
$0
Payment
ADS
Interest
Balance
LC
PA
UNAMT

2
$506,353
$0
$0
$0
$0
$0
$0
$0
$0
Payment
ADS
Interest
Balance
LC
PA
UNAMT

3
$498,641
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Payment
ADS
Interest
Balance
LC
PA
UNAMT

4
$490,268
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Payment
ADS
Interest
Balance
LC
PA
UNAMT

$101,296 $104,335 $107,465

10

$110,689

$114,009

$117,430

$5,373

$5,534

$5,700

$5,871

$96,231

$99,118 $102,091

$105,154

$108,309

$111,558

$7,698
$9,662
$2,638
$11,885
$1,351

$7,929
$9,855
$2,691
$12,242
$1,391

$8,167
$10,052
$2,744
$12,609
$1,433

$8,412
$10,253
$2,799
$12,987
$1,476

$8,665
$10,458
$2,855
$13,377
$1,520

$8,925
$10,667
$2,912
$13,778
$1,566

$62,997

$65,010

$67,086

$69,226

$71,433

$73,709

$40,108
$18,907
$208

$39,329
$18,907
$208

$38,483
$18,907
$208

$37,565
$18,907
$208

$36,568
$18,907
$208

$35,486
$18,122
$208

$3,774

$6,565

$9,487

$12,546

$15,750

$19,893

34.00%
$1,283

34.00%
$2,232

34.00%
$3,226

$5,065

$5,217

34.00%
$4,266

34.00%
$5,355

34.00%
$6,764

$62,997

$65,010

$67,086

$69,226

$71,433

$73,709

$49,199
$0

$49,199
$0

$49,199
$0

$49,199
$0

$49,199
$0

$49,199
$0

$13,798

$15,810

$17,886

$20,027

$22,234

$24,510

$1,283

$2,232

$3,226

$4,266

$5,355

$6,764

$12,515

$13,578

$14,661

$15,761

$16,879

$17,747

1.28

1.32

1.36

1.41

1.45

1.50

81.38%

79.85%

78.36%

76.91%

75.50%

74.13%

34.54%

34.41%

34.29%

34.17%

34.05%

33.93%

10.21%

11.69%

13.23%

14.81%

16.45%

18.13%

9.69%

10.00%

10.32%

10.65%

10.99%

11.34%

9.26%

10.04%

10.84%

11.66%

12.48%

13.13%

$481,177

$471,307

$460,591

$448,957

$436,326

$422,613

$0

$0

$0

$0

$0

$0

$760,868

$785,163

$810,215

$836,049

$862,689

$890,159

$40,108

$39,329

$38,483

$37,565

$36,568

$35,486

$4,099.94
$49,199
$40,108
$481,177
$4,368
$208
$4,160

$4,099.94
$49,199
$39,329
$471,307
$4,160
$208
$3,952

$4,099.94
$49,199
$38,483
$460,591
$3,952
$208
$3,744

$4,099.94
$49,199
$37,565
$448,957
$3,744
$208
$3,536

$4,099.94
$49,199
$36,568
$436,326
$3,536
$208
$3,328

$4,099.94
$49,199
$35,486
$422,613
$3,328
$208
$3,120

5
$481,177
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Payment
ADS
Interest
Balance
LC
PA
UNAMT

6
$471,307
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
Payment
ADS
Interest

7
$460,591
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0

8
$448,957
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0

9
$436,326
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0

10
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0

Balance
LC
PA
UNAMT

$0
$0
$0
$0

$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0

Payment
ADS
Interest
Balance
LC
PA
UNAMT

$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0

Payment
ADS
Interest
Balance
LC
PA
UNAMT
Payment
ADS
Interest
Balance
LC
PA
UNAMT

$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0
$0

11
$120,952
$6,048
$114,905
$9,192
$10,881
$2,971
$14,192
$1,613
$76,057

Sale Proceeds After Tax

Sale Price
-Cost of Sale
-Mortgage Balance
Sale Proceeds Before Tax
25.00%
-Tax on Cost Recovery Recapture
-Tax on Capital Gain 15.00%
-Tax (Savings) on Ordinary Income34.00%
Sale Proceeds After Tax

Taxable Income From Sal

Sale Price
-Cost of Sale
-Adjusted Basis
Total Gain
-Total Cost Recovery Taken
Capital Gain
Unamortized Loan Costs

Sale Price
Cost of Sale
Adjusted Basis
Total Gain
Total Cost Recovery Taken
Capital Gain
Unamortized Loan Costs

$760,566

Sale Price
Cost of Sale
Mortgage Balance
Sale Proceeds Before Tax
Tax on Cost Recovery Recapture
Tax on Capital Gain
Tax (Loss) on Ordinary Income
Sale Proceeds After Tax

$760,566

$53,240
$462,500
$244,826
$187,500
$57,326
($3,120)

$53,240
$422,613
$284,713
$46,875
$8,599
($1,061)
$230,300

$0
$0

s After Tax

25.00%
34.00%

$760,566
$53,240
$422,613
$284,713
$46,875
$8,599
($1,061)
$230,300

e From Sale
$760,566
$53,240
$462,500
$244,826
$187,500
$57,326
($3,120)

Projected Investmen
Unleveraged
Before Tax
$
EOY
0 ($650,000)
$55,537
1
$57,317
2
$59,152
3
$61,045
4
$62,997
5
$65,010
6
$67,086
7
8
$69,226
9
$71,433
10
$73,709 + $707,326

IRR =10.19%

Leveraged
Before Tax
$
EOY
0 ($135,200)
$6,338
1
$8,117
2
$9,953
3
$11,846
4
$13,798
5
$15,810
6
$17,886
7
8
$20,027
9
$22,234
10
$24,510 + $284,713

IRR = 14.94%

EOY
0
1
2
3
4
5
6
7
8
9
10

$
($135,200)
$6,338
$8,117
$9,953
$11,846
$13,798
$15,810
$17,886
$20,027
$22,234
$24,510 +

IRR = 14.94%

$284,713

IRR =

0
1
2
3
4
5
6
7
8
9
10

($650,000)
$55,537
$57,317
$59,152
$61,045
$62,997
$65,010
$67,086
$69,226
$71,433
$73,709

$707,326

bt
($135,200)
$6,338
$8,117
$9,953
$11,846
$13,798
$15,810
$17,886
$20,027
$22,234
$309,223

unl
($650,000)
$55,537
$57,317
$59,152
$61,045
$62,997
$65,010
$67,086
$69,226
$71,433
$781,036

14.94%

10.19%

stment Yields
Leveraged
After Tax

$284,713

4.94%

$
EOY
0 ($135,200)
$8,190
1
$9,441
2
$10,446
3
$11,470
4
$12,515
5
$13,578
6
$14,661
7
8
$15,761
9
$16,879
10
$17,747 + $230,300

IRR = 12.77%

EOY
0
1
2
3
4
5
6
7
8
9
10

($135,200)
$8,190
$9,441
$10,446
$11,470
$12,515
$13,578
$14,661
$15,761
$16,879
$17,747 +

IRR = 12.77%

$230,300

at
($135,200)
$8,190
$9,441
$10,446
$11,470
$12,515
$13,578
$14,661
$15,761
$16,879
$248,047
12.77%

Required Rate of Return =

Note that the IRR is =

12.50% from input page

12.77% if the IRR is the same as the RRR the NPV will be zero

Net Present Value of Equity

Planned Equity
Value of Mortgage

$2,207.57
$135,200
$520,000
$657,407.57

Total Investment Value of

Property at RRR

Initial Cash Year 1

($135,200)

$8,190

$9,441

$10,446

$11,470

me as the RRR the NPV will be zero

$12,515

$13,578

$14,661

$15,761

10

$16,879 $248,047