Term
| What do DCF valuations take into consideration? |
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Definition
Makes market based assumptions regarding
- rental income over the course of the year
- growth over either the year or review periods
- tax
- changes in financial rates
- assumptions about holding periods (forecasting over the period of time owner holds property - ie. 20yrs)
- obsolescence - exit yield
-outgoings
-income |
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Term
| What is the main difference between DCF calculations and traditional ARY valuations? |
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Definition
| the main difference is the fact that traditional ARY capitalisation valuations make implicit assumptions and DCF valuations make explicit assumptions - considering all variables individually and thus allowing the ability to question the certainty of each of those variables. |
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Term
| Why is the DCF valuation method considered transparent or explicit in comparison to the traditional ARY method? |
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Definition
ARY method makes implicit assumptions on comparables to the subject property which are considered subjective
The ARY method only considers the net income per year whereas the DCF method considere all future sums - income growth. |
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Term
| Explain what the IRR (internal rate of return)shows |
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Definition
If the NPV (net Present value) is positive - it will suggest the investment is worthwhile and even have surplus profit.
If the NPV is negative it will suggest the investment would not be a viable option as it would make a loss and not make a return on the target rate.
If the NPV is 0 then it infers that the investment will not make a loss - it shows the true rate of return on the investment. |
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Term
| What is useful about using the DCF method? |
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Definition
| Because each variable is inputted separately, it allows the valuer to question the certainty of each input individually |
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