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Multi-Level marketing class lectures_240732564-Class-5-Lecture-Notes-for-Ch-10

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Chapter 10: BASIC MICRO-LEVEL VALUATION: "DCF" & “NPV” Copyright © 2007 Thomson/South-Western, Geltner/Miller/Clayton/Eichholtz, 2e 1 THE famous DCF VALUATION PROCEDURE 1. 2. 3. FORECAST THE EXPECTED FUTURE CASH FLOWS; ASCERTAIN THE REQUIRED TOTAL RETURN; DISCOUNT THE CASH FLOWS TO PRESENT VALUE AT THE REQUIRED RATE OF RETURN. THE VALUE YOU GET TELLS YOU WHAT YOU MUST PAY SO THAT YOUR EXPECTED RETURN WILL EQUAL THE "REQUIRED RETURN" AT WHICH YOU DISCOUNTED THE EXPECTED CASH FLOWS. Copyright © 2007 Thomson/South-Western, Geltner/Miller/Clayton/Eichholtz, 2e 2 Why is the DCF procedure important? 1. Recognizes asset valuation fundamentally depends upon future net cash flow generation potential of the asset. 2. Takes long-term perspective appropriate for investment decision-making in illiquid markets (multi-period, typically 10 yrs in R.E. applications). 3. Takes the total return perspective necessary for successful investment. 4. Due to the above, the exercise of going through the DCF procedure, if taken seriously, can help to protect the investor from being swept up by an asset market “bubble” (either a positive or negative bubble – when asset prices are not related to cash flow generation potential). Copyright © 2007 Thomson/South-Western, Geltner/Miller/Clayton/Eichholtz, 2e 3 10.2.2 Blended IRR: A single Discount Rate Current practice usually is not sophisticated for typical properties. If the lease expiration pattern is typical, a single “blended? ...
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