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Draft: January 2011Discounted 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
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.
Investor Assumptions
1. Tax Rate on Ordinary Income 34.00% Lightly Shaded Cells
2. Tax Rate on Capital Gains 15.00% are Input Cells
3. Tax Rate on Cost Recovery Recapture 25.00%
4. Projected Holding Period 10
5. EOY 10 Resale Price Cap Rate (Uses 11th Year NOI or $ Amount) Ex. Enter 10% here as 10.0 6.00% $1,710,607
6. Disposition Cost of Sale 5.00%
7
7. Purchase Price (Acquisition Cap Rate or $ Amount) 1,100,000.00 $1,100,000
8. Acquisition Costs $0
9. Improvement Allocation 80.00%
10. Useful Life 27.5
11. Year 1 Potential Rental Income/Constant Annual Growth Rate $90,000 5.00%
12. Constant Vacancy Rate (Ex: Enter 5% here as .05) 4.00%
13. Property Management Expense (% of Effective Rental Income) 6.00%
14. Year 1 Property Taxes/Constant Annual Growth Rate $8,926 2.00%
15. Year 1 Property Insurance/Constant Annual Growth Rate $2,437 2.00%
16. Year 1 Repairs and Maintenance/Constant Annual Growth Rate $10,560 3.00%
17. Year 1 Accounting and Advertising/Constant Annual Growth Rate $1,200 3.00%
Acquisition Financing Assumptions
18. Calculation of Loan Amount (% of Purchase Price, DCR, or Loan Amount) 55.00 $605,000
19. Interest Rate (Enter as decimal form, .08 = 8.0%) 6.00%
20. Amortization Period 25
21. Term 25
22. Payments Per Year 12
23. Loan Costs (% of Loan Amount or $ Amount) 1.00 Clear
Refinance Assumptions
24. Projected Year of Refinance (EOY) 4
25. Calculation of Loan Amount (% of Value,DCR, or Loan Amount) 1.25 $834,578
26. Interest Rate 5.00%
27. Amortization Period 25
28. Term 25
29. Payments Per Year 12
30. Loan Costs (% of Loan Amount or $ Amount) 0.00
Net Present Value Analysis Assumptions for Valuation
31 Required Rate of Return After Tax 12.50%
Lightly Shaded Cells
are Input Cells

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) N/A
Loan Amount $605,000
Interest Rate 6.00%
Payments Per Year
Periodic Payment $3,898.02
Annual Debt Service $46,776
Amortization Period
Term
Loan Costs $6,050
Effective Cost of Borrowed Funds
6.29%
Property Information
Purchase Price $1,100,000
Acquisition Costs $0
Acquisition Cap Rate 5.28%
Initial Investment $501,050
Cost Recovery Value of Improvements $880,000
Useful Life 27.5
11 1/2 Month Year Cost Recovery Deduction $30,668
Full Year Cost Recovery Deduction $31,997
Disposition Cap Rate 6.00%
Projected End of Year 10 Sale Price $1,710,607
Projected End of Year 10 Cost of Sale $85,530

Acquisition Financing Information


Loan Amount $605,000
Interest Rate 6.00%
Payments Per Year 12
Periodic Payment $3,898.02
Annual Debt Service $46,776
Amortization Period 25
Term 25
Loan Costs $6,050
Effective Cost of Borrowed Funds 6.29%

Refinance Information
Projected Year of Refinance (End of Year) 4
Loan Amount $834,578
Interest Rate 5.00%
Payments Per Year 12
Periodic Payment $4,878.86
Annual Debt Service $58,546
Amortization Period 25
Term 25
Loan Costs $0
Effective Cost of Borrowed Funds 5.00%
Initial Investment $501,050
Cost Recovery Value of Improvements $880,000
11 1/2 Month Year Cost Recovery %age 3.485%
Full Year Cost Recovery %age 3.636%
2.457%
2.564%

Year of Refinance (EOY)


Refinance Loan Amount
tion Summary

$1,100,000
$0
5.28%
$501,050
$880,000
27.5
$30,668
$31,997
6.00%
$1,710,607
$85,530

Acquisition Refinance
N/A 4
$605,000 $834,578
6.00% 5.00%
12 12
$3,898.02 $4,878.86
$46,776 $58,546
25 25
25 25
$6,050 $0
6.29% 5.00%
$1,000 $6.44
($990)
1 $982.20 7.05%
2 $963.30 6.54%
3 $943.24 6.38%
4 $921.94 6.29%
5 $899.32 6.24%
6 $875.31 6.21%
7 $849.82 6.19%
8 $822.76 6.17%
9 $794.02 6.16%
10 $763.52 6.15%
$1,000 $5.85
($1,000.00)
balance
1 $979.38 5.00%
2 $957.71 5.00%
3 $934.92 5.00%
4 $910.98 5.00%
5 $885.80 5.00%
6 $859.34 5.00%
7 $831.52 5.00%
8 $802.29 5.00%
9 $771.55 5.00%
10 $739.24 5.00%
END OF YEAR 1 2 3 4
1. POTENTIAL RENTAL INCOME $90,000 $94,500 $99,225 $104,186
2. Vacancy Loss $3,600 $3,780 $3,969 $4,167
3. EFFECTIVE RENTAL INCOME $86,400 $90,720 $95,256 $100,019
4. Less: Operating Expenses
5. Management $5,184 $5,443 $5,715 $6,001
6. Property Taxes $8,926 $9,105 $9,287 $9,472
7. Property Insurance $2,437 $2,486 $2,535 $2,586
8. Maintenance & Repairs $10,560 $10,877 $11,203 $11,539
9. Accounting & Advertising $1,200 $1,236 $1,273 $1,311
10. NET OPERATING INCOME $58,093 $61,574 $65,242 $69,109
11. Less: Interest $36,007 $35,342 $34,638 $33,889
12. Cost Recovery $30,668 $31,997 $31,997 $31,997
13. Loan Costs Amortization $242 $242 $242 $5,324
14. TAXABLE INCOME ($8,824) ($6,008) ($1,635) ($2,102)
15. Times Tax Rate 34.00% 34.00% 34.00% 34.00%
16. Tax Liability (Savings) ($3,000) ($2,043) ($556) ($715)
17. NET OPERATING INCOME $58,093 $61,574 $65,242 $69,109
18. Less: Annual Debt Service $46,776 $46,776 $46,776 $46,776
19. Capital Contributions $0 $0 $0 ($276,806)
20. CASH FLOW BEFORE TAX $11,317 $14,798 $18,466 $299,138
21. Less: Tax Liability ($3,000) ($2,043) ($556) ($715)
22. CASH FLOW AFTER TAX $14,317 $16,840 $19,022 $299,853

23. Debt Coverage Ratio 1.24 1.32 1.39 1.48


24. Breakeven Occupancy Percent 83.43% 80.34% 77.39% 74.56%
25. Expense Ratio 32.76% 32.13% 31.51% 30.90%
26. Before Tax Cash on Cash 2.26% 2.95% 3.69% 59.70%
27. Return on Asset 5.28% 5.60% 5.93% 6.28%
28. After Tax Cash on Cash 2.86% 3.36% 3.80% 59.84%
29. EOY Balance (Acquisition Loan) $594,231 $582,797 $570,659 $557,772

30. EOY Balance (Refinanced Loan) $0 $0 $0 $834,578

31. Property Value (Acquisition CR) $1,165,908 $1,235,375 $1,308,584 $1,385,730

32.
33.

$36,007 $35,342 $34,638 $33,889


Acquisition Loan
$605,000
Payment $3,898.02 $3,898.02 $3,898.02 $3,898.02
ADS $46,776 $46,776 $46,776 $46,776
Interest $36,007 $35,342 $34,638 $33,889
Balance $594,231 $582,797 $570,659 $557,772
Loan Costs $6,050 $5,808 $5,566 $5,324
Annual LC Amortization $242 $242 $242 $242
Unamortized Loan Costs $5,808 $5,566 $5,324 $5,082
Refinance Loan
1 2 3 4
Refinance Proceeds ($107,956) ($161,227) ($217,457) ($276,806)
Loan Amount $702,187 $744,024 $788,116 $834,578
Payment $4,105 $4,105 $4,105
ADS $49,259 $49,259 $49,259
Interest $34,781 $34,039 $33,261
Balance $687,709 $672,489 $656,491
LC $0 $0 $0
PA $0 $0 $0
UNAMT $0 $0 $0
Payment $4,349 $4,349
ADS $52,194 $52,194
Interest $36,853 $36,068
Balance $728,683 $712,557
LC $0 $0
PA $0 $0
UNAMT $0 $0
Payment $4,607
ADS $55,287
Interest $39,037
Balance $771,866
LC $0
PA $0
UNAMT $0
Payment
ADS
Interest
Balance
LC
PA
UNAMT
5 6 7 8 9 10
$109,396 $114,865 $120,609 $126,639 $132,971 $139,620
$4,376 $4,595 $4,824 $5,066 $5,319 $5,585
$105,020 $110,271 $115,784 $121,573 $127,652 $134,035

$6,301 $6,616 $6,947 $7,294 $7,659 $8,042


$9,662 $9,855 $10,052 $10,253 $10,458 $10,667
$2,638 $2,691 $2,744 $2,799 $2,855 $2,912
$11,885 $12,242 $12,609 $12,987 $13,377 $13,778
$1,351 $1,391 $1,433 $1,476 $1,520 $1,566
$73,183 $77,476 $81,999 $86,763 $91,782 $97,069
$41,338 $40,457 $39,532 $38,559 $37,537 $36,461
$31,997 $31,997 $31,997 $31,997 $31,997 $30,668
$0 $0 $0 $0 $0 $0
($152) $5,021 $10,469 $16,207 $22,248 $29,939
34.00% 34.00% 34.00% 34.00% 34.00% 34.00%
($52) $1,707 $3,560 $5,510 $7,564 $10,179
$73,183 $77,476 $81,999 $86,763 $91,782 $97,069
$58,546 $58,546 $58,546 $58,546 $58,546 $58,546
$0 $0 $0 $0 $0 $0
$14,637 $18,929 $23,452 $28,217 $33,236 $38,522
($52) $1,707 $3,560 $5,510 $7,564 $10,179
$14,688 $17,222 $19,893 $22,707 $25,672 $28,343

1.25 1.32 1.40 1.48 1.57 1.66


82.62% 79.52% 76.56% 73.72% 71.01% 68.41%
30.32% 29.74% 29.18% 28.63% 28.10% 27.58%
2.92% 3.78% 4.68% 5.63% 6.63% 7.69%
6.65% 7.04% 7.45% 7.89% 8.34% 8.82%
2.93% 3.44% 3.97% 4.53% 5.12% 5.66%
$0 $0 $0 $0 $0 $0
$817,370 $799,281 $780,267 $760,280 $739,271 $717,186
$1,467,015 $1,552,656 $1,642,875 $1,737,911 $1,838,011 $1,943,437
$33,093 $32,250 $31,354 $30,403 $29,393 $28,321

$3,898.02 $3,898.02 $3,898.02 $3,898.02 $3,898.02 $3,898.02


$46,776 $46,776 $46,776 $46,776 $46,776 $46,776
$33,093 $32,250 $31,354 $30,403 $29,393 $28,321
$544,089 $529,563 $514,141 $497,768 $480,385 $461,930
$5,082 $4,840 $4,598 $4,356 $4,114 $3,872
$242 $242 $242 $242 $242 $242
$4,840 $4,598 $4,356 $4,114 $3,872 $3,630
5 6 7 8 9 10
($339,445) ($405,549) ($475,307) ($548,917) ($626,587)
$883,534 $935,112 $989,448 $1,046,685 $1,106,972 $1,170,466
$4,105 $4,105 $4,105 $4,105 $4,105 $4,105
$49,259 $49,259 $49,259 $49,259 $49,259 $49,259
$32,443 $31,582 $30,678 $29,727 $28,728 $27,678
$639,675 $621,998 $603,417 $583,885 $563,354 $541,773
$0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0
$4,349 $4,349 $4,349 $4,349 $4,349 $4,349
$52,194 $52,194 $52,194 $52,194 $52,194 $52,194
$35,243 $34,376 $33,464 $32,506 $31,498 $30,440
$695,606 $677,788 $659,058 $639,370 $618,674 $596,920
$0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0
$4,607 $4,607 $4,607 $4,607 $4,607 $4,607
$55,287 $55,287 $55,287 $55,287 $55,287 $55,287
$38,205 $37,332 $36,412 $35,447 $34,433 $33,365
$754,784 $736,829 $717,954 $698,114 $677,260 $655,338
$0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0
$4,879 $4,879 $4,879 $4,879 $4,879 $4,879
$58,546 $58,546 $58,546 $58,546 $58,546 $58,546
$41,338 $40,457 $39,532 $38,559 $37,537 $36,461
$817,370 $799,281 $780,267 $760,280 $739,271 $717,186
$0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0
$0 $0 $0 $0 $0 $0
Payment $5,165 $5,165 $5,165 $5,165 $5,165
ADS $61,981 $61,981 $61,981 $61,981 $61,981
Interest $43,763 $42,832 $41,851 $40,822 $39,739
Balance $865,316 $846,167 $826,037 $804,878 $782,636
LC $0 $0 $0 $0 $0
PA $0 $0 $0 $0 $0
UNAMT $0 $0 $0 $0 $0
Payment $5,467 $5,467 $5,467 $5,467
ADS $65,599 $65,599 $65,599 $65,599
Interest $46,318 $45,331 $44,295 $43,204
Balance $915,831 $895,563 $874,259 $851,864
LC $0 $0 $0 $0
PA $0 $0 $0 $0
UNAMT $0 $0 $0 $0
Payment $5,784 $5,784 $5,784
ADS $69,411 $69,411 $69,411
Interest $49,010 $47,965 $46,869
Balance $969,047 $947,601 $925,059
LC $0 $0 $0
PA $0 $0 $0
UNAMT $0 $0 $0
Payment $6,119 $6,119
ADS $73,426 $73,426
Interest $51,844 $50,740
Balance $1,025,103 $1,002,417
LC $0 $0
PA $0 $0
UNAMT $0 $0
Payment $6,471
ADS $77,655
Interest $54,830
Balance $1,084,147
LC $0
PA $0
UNAMT $0
11
$146,601
$5,864
$140,736

$8,444
$10,881
$2,971
$14,192
$1,613
$102,636
Sale Proceeds After Tax
Sale Price
-Cost of Sale
-Mortgage Balance
Sale Proceeds Before Tax
-Tax on Cost Recovery Recapture 25.00%
-Tax on Capital Gain 15.00%
-Tax (Savings) on Ordinary Income 34.00%
Sale Proceeds After Tax

Taxable Income From Sale


Sale Price
-Cost of Sale
-Adjusted Basis
Total Gain
-Total Cost Recovery Taken
Capital Gain
Unamortized Loan Costs
Sale Price $1,710,607
Cost of Sale $85,530
Adjusted Basis $782,688
Total Gain $842,389
Total Cost Recovery Taken $317,312
Capital Gain $525,077
Unamortized Loan Costs $0

Sale Price $1,710,607


Cost of Sale $85,530
Mortgage Balance $717,186
Sale Proceeds Before Tax $907,891
Tax on Cost Recovery Recapture $79,328
Tax on Capital Gain $78,761
Tax (Loss) on Ordinary Income $0
Sale Proceeds After Tax $749,801

$0
$0
After Tax
$1,710,607
$85,530
$717,186
$907,891
25.00% $79,328
$78,761
34.00% $0
$749,801

e From Sale
$1,710,607
$85,530
$782,688
$842,389
$317,312
$525,077
$0
Projected Investment
Unleveraged Leveraged
Before Tax Before Tax
EOY $ EOY $
0 ($1,100,000) 0 ($501,050)
1 $58,093 1 $11,317
2 $61,574 2 $14,798
3 $65,242 3 $18,466
4 $69,109 4 $299,138
5 $73,183 5 $14,637
6 $77,476 6
$81,999 $18,929
7 7 $23,452
8 $86,763 8
$91,782 $28,217
9 9 $33,236
10 $97,069 + $1,625,077 10 $38,522 + $907,891
IRR = 9.68% IRR = 14.34%
EOY $
0 ($501,050)
1 $11,317
2 $14,798
3 $18,466
4 $299,138
5 $14,637
6 $18,929
7 $23,452
8 $28,217
9 $33,236
10 $38,522 + $907,891

IRR = 14.34% IRR =


0 ($1,100,000)
1 $58,093
2 $61,574
3 $65,242
4 $69,109
5 $73,183
6 $77,476
7 $81,999
8 $86,763
9 $91,782
10 $97,069 $1,625,077

bt unl
($501,050) ($1,100,000)
$11,317 $58,093
$14,798 $61,574
$18,466 $65,242
$299,138 $69,109
$14,637 $73,183
$18,929 $77,476
$23,452 $81,999
$28,217 $86,763
$33,236 $91,782
$946,413 $1,722,145

14.34% 9.68%
stment Yields
Leveraged
After Tax
EOY $
0 ($501,050)
1 $14,317
2 $16,840
3 $19,022
4 $299,853
5 $14,688
6 $17,222
7 $19,893
8 $22,707
9 $25,672
10
$907,891 $28,343 + $749,801
4.34% IRR = 12.77%
EOY
0 ($501,050)
1 $14,317
2 $16,840
3 $19,022
4 $299,853
5 $14,688
6 $17,222
7 $19,893
8 $22,707
9 $25,672
10 $28,343 + $749,801

IRR = 12.77%
at
($501,050)
$14,317
$16,840
$19,022
$299,853
$14,688
$17,222
$19,893
$22,707
$25,672
$778,144

12.77%
Required Rate of Return = 12.50% from input page
Note that the IRR is = 12.77% if the IRR is the same as the RRR the NPV will be zero
Net Present Value of Equity $7,357.09
Planned Equity $501,050
Value of Mortgage $605,000
$1,113,407.09
Total Investment Value of
Property at RRR

Initial Cash Year 1 2 3 4

($501,050) $14,317 $16,840 $19,022 $299,853


me as the RRR the NPV will be zero

5 6 7 8 9 10

$14,688 $17,222 $19,893 $22,707 $25,672 $778,144