Economics of the Discounted Cash Flow Valuation Model

This chapter explains the concepts needed for a good economic valuation of a real estate property or development, and distinguishes between the various terms used in this process. It discusses the basic concepts and meanings associated with the valuation of real estate and use of the discounted cash flow (DCF) model. The chapter then presents the differences between discount rate, opportunity cost of capital (OCC), and internal rate of return (IRR). Next, the chapter discusses the concept of net present value (NPV) and how it differs in concept and use from the IRR. If one discounts at the OCC, the present value obtained will be the estimated market value (assuming unbiased projected cash flows). If he/she then pays a price equal to that market value, his/her going-in IRR in the investment will be the OCC, the fair return given the amount of risk.