Showing posts with label NPV. Show all posts
Showing posts with label NPV. Show all posts

Wednesday, December 31, 2014

Net Present Value, Discouted Cash Flow, and Profitability Index: Their Uses, Benefits and Drawbacks

It’s good to finally post again. I have recently finished reading What Every Real Estate Investor Needs to Know About Cash Flow…and 36 Other Key Financial Measures, by Frank Gallinelli. Gallinelli’s book is a well-known, highly respected “must read” for those who are looking to understand the basics of commercial real estate property valuation. Having read a number of books on real estate, I have come to two realizations—1) Books on investment property metrics and valuations, by and large, are very similar, 2) I secretly enjoy reading books about real estate. At first, I thought I was reading for informational purposes, but having read about NOI for at least the 20th time, I have finally admitted to myself that I enjoy doing so. Now let’s get to the meat and potatoes.

Discounted Cash Flow (DCF), Net Present Value (NPV) and Profitability Index are all measures of the value of investment property cash flow. The DCF is derived from the sum of a property’s cash flows, present or projected, discounted to the present. Discounting the value of a cash flow is necessary, due to the time value of money, which accounts for the fact that money today is more valuable than money in the future. An in depth discussion of the time value of money is beyond the scope of this post, but I am more than happy to write a post on it, if I receive a few request for one in the comments below.