The third method, as I said before, of estimating the sale price of a property

is using discounted cashflow methods.

Okay here's our D, here's our C, here's our F.

You started to learn about these with Professor O'Dell

in his Mathematics of Money chapter.

We're going to review this a little bit more in our next chapter,

but for now let me say a few things about DCF.

Okay, one common discounted cash flow

method is called the net present value method

which looks mathematically like this.

And what it says in words is the net present value

of a project is equal to the sum of each cash flow for

the sponsor, for always one entity at a time,

of this project, for the sponsor of this project

brought back to its equivalent at T equals 0.

As you've learned in your Mathematics of Money chapter, you can't,

when you're being careful and using discounted cashflow methods,

you've gotta consider cash as a function of time.

So you can't add up cashflows to or from an entity, a developer, a sponsor,

a lender until you first brought them back to an equivalent time, say T = 0.

So, that's what's going on here.

Each cash flow for the developer of the project is being brought back

to time T = 0, the beginning of the project.

Once we've done that we add them all up, and now what do we have?

We have a set of apples-to-apples cash flows.

And if the sum of the positive cash flows for

CAG is on this apples to apples discounted basis is greater

than the sum of the expenditures on this apples to apples discounted basis,

then that's a positive number.

Than means they've made money, okay?

And that's what we call the NPV.

The NPV is simply just the sum of all those discounted casuals.

If it's positive, it means they estimate the project that will make money for CAG.

If it's not positive, they don't.

And the great thing about DCF that makes it so much better than cap rate

is that we've got a set of future

cashflows that we're looking at here, not just one year.

So, you can go out five years and say well, demand in the first year is going

to be pretty good, but in the second year it'll be more, we can raise our rates.

We'll have a higher NOI, etc, etc, so

we can build a better model of the future with DCF methods.

Okay, all the definitions for everything in this equation are down here.

You're welcome to review them.

We are going to cover them a bit in my next module, so

if you want to wait, that's fine.

So we're not going to do a UCF calculation right now,

that'll come in the next two modules for this project, but

just a few words on how we think about NPV, okay?

So from CAG's perspective, right, they would like

the NPV to the project buyer to be a slow as possible.

So they'd like the buyer to make a mistake, and get a negative NPV for

the buyer.

They're expecting, what's fair is NPV at zero,

that's considered the fair deal for the seller and the buyer.

And if CAG is a bad negotiator, makes a big mistake and sells the property for

too little they're going to find the buyer has an NPV of greater than zero.

Okay, so problems with DCF methods,

NPV in particular, why aren't we using it right now?

It's very complicated.

We need to review what you're done with Professor O'Dell before we get there and

we're going to need to learn a few more things before we're able to do this for

real estate projects like this development project.