ABSTRACT
This chapter deals with income capitalisation, and what is seen in the United kingdom as a different method, discounted cash flow. It considers the basic methodology before examining their specific application to freehold and leasehold properties. The chapter explores lease terms; tenant covenant; the quality of the property itself; and location. The sum of the discounted benefits is found and the initial cost of the investment deducted from this sum, to leave what is termed the net present value of the investment, which may be positive or negative. The Internal rate of return (IRR) is the discount rate that equates the discounted flow of future benefits with the initial outlay. Spreadsheets are ideally suited to financial modelling, the application of discounted cash flow solutions and the calculation of IRR. The chapter demonstrated the use of the present value function to assess the acceptability of investment opportunities measured against an investor's target rate of return.
