A method used to assess the relative
merits of real estate investments based on
present value comparisons of future cash
flows. Discounted cash flow (DCF) involves
the analysis of operations and sale proceeds
(reversionary) cash flow. DCF analysis can
be before tax or after tax depending on
circumstances surrounding the analysis.
This method provides a dynamic portrayal
of cash flows, as opposed to a static
one-year projection used in direct
capitalization. After tax analysis of cash
flows is commonly associated with investment
value estimates, however, DCFs have
relevance to both before and after tax
perspectives.
The deciding factor is often the purpose
of the analysis and availability of relevant
information. Regardless, investors can make
informed decisions based on the systematic
presentation of forecasts involving diverse
properties under consideration.
Discounted cash flow is a relative
newcomer to the field of real estate
investment analysis. In the appraisal field,
appraisers now use both discounted cash
flows and direct capitalization. The
discounted cash flow technique is grouped
under the broader category of yield
capitalization. Yield and direct
capitalization make up the two approaches
used under the income approach to value.
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