REE-3043 Chapter Notes - Chapter 14: Cash Flow, Net Present Value


Department
Risk Management/Insurance, Real Estate and Legal Studies
Course Code
REE-3043
Professor
William M Woodyard
Chapter
14

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- Introduction
o The valuation of future benefits is complicated by 2 factors:
1. Even if their timing and magnitude can be known with certainty, the
future benefits of a proposed investment cannot simply be added up to
determine their current value to investors because the present value of
future benefits declines as the time the investor must wait for the future
benefits increases
2. Value assessments are generally based on expected cash flows, but
what actually happens is seldom, if ever, exactly what the investor
expected
The more risk investors face when undertaking an investment, the
greater the rate of return they should expect
- The Time Value of Money
o Terminology
Future Value (FV)- the value of money is some period beyond time zero
Calculating a future value means converting cash invested in the
current period into what it will be worth at some future date
Present Value (PV)- the value of future cash flows at time zero
Taking the present value of inflows means converting future cash
flows in present value
Lump Sum- a one-time receipt or expenditure occurring in a given period
Ordinary Annuity (A)- a fixed amount of money paid or received at the
end of every period
Compounding- calculation of future values
Discounting- calculation of present values
o Equations, Calculators, and Spreadsheets
N- the number of compounding periods
I- the periodic interest rate
PV- the lump sum amount invested at time zero
PMT- the periodic level payment or receipt
This may be a fixed monthly mortgage payment or a lease
payment
FV- the lump sum cash flow or the future value of an investment
o The rate of return is usually referred to as the investment yield or the internal
rate of return (IRR)
o The alulated IRR a e opaed to the ivesto’s euied IRR o siila
projects of equivalent risk
If the going-i IRR exeeds the ivesto’s euied ate of etu, the
investment should be undertaken
If the going-i IRR is less tha the ivesto’s euied ate of etu, the
investment should be forgone and other opportunities pursued
o Value and Risk
Many investors believe that high quality industrial property tend to have
relatively reliable cash flows
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