Valuation question
Question specifically to DCF for valuation.
So say I have a 10 year hold I am assuming.
I have cash flows of:
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
So am I capping Year 10 in Year 9 and then discounting Years 10 cash flows or am I capping Year 10 in Year 10 and discounting all cash flows Year 1-10?
Sorry if stupid and or confusing question.
Not sure i understand your question. Just cap Year 10 then discount back 10 years. Though, in today's environment, I'm not sure what cap rate and discount rate you would use.
So if I’m using an 8% discount rate and Cap of 6% and my cash flows are as followed:
Year 0 $5,000,000 Year 1. $550000 Year 2. $6300000 Year 3. $6800000 Year 4. $7500000 Year 5. $7700000 Year 6. $7900000 Year 7. $8200000 Year 8. $8500000 Year 9. $8600000 Year 10. $8800000
If you are valuing an asset with a 10 year hold you should be applying a direct cap to year 11 to get the terminal value in year 10. Think about it logically, The next buyer is buying the asset at an X% direct cap rate based on their first year of projected NOI for their hold period, which would be the 11th year in your scenario / projection.
correct ^^ ... residual value is always based on the projected year 1 cash flow/NOI for the new buyer.. in other words, your year 11.
Thank you this is exactly what I was trying to ask in my OP
So how come I’ve seen DCFs that just cap the actual exit year?
They're simply modeling it incorrectly haha and to their detriment because value in year 11 is going to be higher than year 10 99.9% of the time
Because they are capping NOI Time+1 and discounting that lump sum back to PV
Ok so just to gut check what would the correct exit value be in my above assumptions and cash flows?
What's your year 11 NOI and what cap rate are you using? The terminal value in year 10 is a function of the Year 11 NOI divided by the cap rate.
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