Microsoft Office Tutorials and References
In Depth Information
Chapter 12: Discounting and Depreciation Formulas
The NPV calculation is in cell B16, which contains the following formula:
This example might seem unusual, but it is common in real estate situations in which rent is paid
in advance. This calculation indicates that you can pay $197,292.96 for a rental property that pays
back the future cash flows in rent. The first year’s rent, however, is due immediately. Therefore,
the first year’s rent is shown at Time 0.
Terminal values
The previous example is missing one key element: namely, the disposition of the property after
seven years. You could keep renting it forever, in which case you need to increase the number of
cash flows in the calculation. Or you could sell it, as shown in Figure 12-5.
Figure 12-5: The initial investment may still have value at the end of the cash flows.
The NPV calculation in cell D15 is
In this example, the investor can pay $428,214.11 for the rental property, collect rent for seven
years, sell the property for $450,000, and make 10% on his investment.
Initial and terminal values
This example uses the same cash flows as the previous example except that you know how much
the owner of the investment property wants. It represents a typical investment example in which
the aim is to determine if, and by how much, an asking price exceeds a desired rate of return, as
you can see in Figure 12-6.
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