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Chapter 4 Introduction To DCF

This document discusses appraisal methods for property investments, focusing on discounted cash flow (DCF) analysis. It defines appraisal as going beyond valuation to include analysis of a property investment's worth. The document introduces the key DCF methods of net present value (NPV) and internal rate of return (IRR). It provides examples of how to calculate NPV and IRR, explaining that a positive NPV means a project is worth undertaking from the investor's perspective. The discount rate used in DCF calculations should reflect the borrowing, opportunity, or target rate for a given investment.

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ELVEVIYONA JOOT
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39 views10 pages

Chapter 4 Introduction To DCF

This document discusses appraisal methods for property investments, focusing on discounted cash flow (DCF) analysis. It defines appraisal as going beyond valuation to include analysis of a property investment's worth. The document introduces the key DCF methods of net present value (NPV) and internal rate of return (IRR). It provides examples of how to calculate NPV and IRR, explaining that a positive NPV means a project is worth undertaking from the investor's perspective. The discount rate used in DCF calculations should reflect the borrowing, opportunity, or target rate for a given investment.

Uploaded by

ELVEVIYONA JOOT
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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REM211: INVESTMENT

VALUATION AND APPRAISAL


Chapter 4: Appraisal of property investment

Dr Nor Nazihah bt Chuweni


Chapter 4:
Appraisal of
property investment

Introduction Equated yield

What is DCF? CHAPTER 4 Equivalent yield

Calculation of NPV What is IRR?


Introduction

What is Discounted DCF involves the Methods of


appraisal? cashflow discounting of future DCF?
receipts and
Valuation – estimation Both valuation and expenditures similar to Two principals methods
of the price of property analysis should be the investment method – Net Present Value
investment, appraisal is carried out together to of valuation but its (NPV) method and
beyond the valuation complete the appraisal allow for inflation, Internal Rate of Return
including the analysis exercise. The technique taxation and frequent (IRR) method
to estimate the worth used in appraisal changes in the amount
of property investment include DCF of income and receipts
Methods of DCF

To calculate
Net Present Value
RM …..

Discounted
Cash flow

Customer Internal rate of


To calculate …..%
Objectives return.
Net Present Value

Interest rate should be paid


Borrowing rate when obtained loan from
financial institutions

Rate of return
used in DCF Opportunity rate Best and safe rate available in
(discount rate) the investment market

The investor’s target rate to


compensate the risk involved and
Target rate
loss of immediate consumption
and inflation
Example:
In investment market, there are 5 investment option to choose from which have different IRR and NPV. In
this example, the investor borrow money at a rate of 8% per annum.

Investment Internal Rate of Return Net Present Value

A 9.3% RM750

B 8.0% RM0

C 5.3% -RM600

D 0% -RM750

E -2.4% -RM1,286
Net Present Value

What is NPV?

The NPV is ‘the total


MARKET Present Value of Discount rate if the NPV more than
ANALYSIS revenues less the total 0; the
Present Value of Borrowing rate project/investment is
. expenditures or Opportunity cost rate worth undertaking. So, if –NPV what does
expenses’ of the Target rate it shows to the
investment. In order to The greater the NPV, investor?
derive the value, the the better is an
discount rate is use i.e investment.
the Present Value of
RM1
Example:

Calculate the NPV of a property investment which will produce a rental income of RM12,000 per annum
(net) over 5 years, using target rate of 10% per annum. The current rental value for such properties is
RM18,000 per annum and ARY is 7%. The investment requires a capital of RM200,000. Advise the
investor.

Year Cashflow YP @ ARY% PV RM 1 @ discount rate Total PV


RM 7% 10% RM
1 12,000 - 0.9091 10,909
2 12,000 - 0.8264 9,917
3 12,000 - 0.7513 9,016
4 12,000 - 0.6830 8,196
5 12,000 - 0.6209 7,451
Reversion 18,000 14.2857 0.6209 159,660
Total NPV 205,197
Less capital invested: -200,000
NPV = 5,197
TUTORIAL:

1. A property is currently let to a tenant for 6 years at rent reserved of RM15,000 per
annum (net). The rental value of similar property are RM18,000 per annum and ARY
for this property is 6%. Calculate the NPV if the investor’s target rate of return is 10%
and the offered price is RM300,000.

What is the NPV? Do we proceed with investment?

2. What if the investor’s target rate of return is 7% or 8%, is it +ve NPV?

UPLOAD YOUR ANSWER IN I-LEARN


Thank You

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