I have had an interview at another real estate firm and need to complete this DCF assignment for a speculative development project. They have given discount rates for the development and absorption phases, however, the description of final period discount rate is rather vague. I normally use WACC, but this implies that Gordon Model shall be used?
Periods 1-5: construction and absorption
Divested at end of Y5
CF starting Y6: USD 800
Growth rate: 1%
Terminal cap rate: 8%
''Assume CF from Y6 starts at USD 800 per year and grows annually at 1% per year. Assume that the client exits the project at the end of year 5 (when the project is fully leased) at a terminal cap rate of 8%.''
To me it, it seems that the right way to go here is:
value = CF / (discount rate - growth)
value = CF / cap rate
cap rate = discount rate - growth rate
discount rate = cap + growth
Therefore, the discount rate is 9 = 8 +1 ?