Discounted Cash Flow Model of Income Valuation

The discounted cash flow (DCF) model determines a properties value by discounting the following values to a present value:         

 

     1) NOI for all years through the end of the projected holding period for the property; and,

 

     2)  Sales proceeds for the property at the end of the projected holding period for the property.

 

 

     To properly apply this approach, the appraiser must develop a forecast of NOI for each year in the expected holding period.  If this information os not available from the property owner, it may be available for comparable properties.  Next, the appraiser will estimate the sales reversion at the end of the holding period.  The appraiser must then determine an appropriate discount rate -- this is typically done through an investor survey.  Finally, the appraiser will set up a T-Bar and solve for the present value of the differential NOI cash flows and reversion value of the property.