Worksheet - Discounted Cash Flow (DCF) Analysis (Please show all work)

Katie Scarlett is analyzing an apartment building for a client for possible purchase. The gross rents are $250,000 in Year 1 and are expected to grow 5% for through Year 3 and then by 3% starting in Year 4 as new supply comes on line. There is currently no vacancy, but is expected to increase to 3.0% as the new supply comes into the market. Katie assumes a more typical vacancy and credit risk of 5% for all periods. Expenses are in line with other properties of the same vintage and run about 50% of gross receipts of Year 1 and will grow independently at the inflation rate 3% per year. The discount rate of return is assumed to be 8% and the reversion cap rate is estimated to be 7%. You recommend to Katie and help her to form a discounted cash flow analysis on the property and recommend a 5-year DCF to get an accurate valuation estimate. What is the current valuation estimate for the apartment building? (10 pts). Hint: the reversion value is based off of Year 6 NOI.

Answer

Period	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Potential Gross Revenue
Vacancy and Credit Loss
Effective Gross Revenue
Operating Expenses
NOI
Cap Rate
Reversion Value

$Year 1/(1.08) =

$Year 2/(1.08)² =

$Year 3/(1.08)³ =

$Year 4/(1.08)⁴=

($Year 5+Reversion)/(1.08)⁵=

_______________________________

Estimate Value =