Discounted Cash Flow (DCF) Analysis Examples

An Introduction to Using Discounted Cash Flow Analysis Calculator

These dcf analysis examples are designed to explain discounted cash flow analysis and how it can be used for different types of cash flow series. For each example, the cash flow scenario is described and then instructions are provided for using Discounted Cash Flow Analysis Calculator to calculate each example.

1.  Real Estate Discounted Cash Flow Analysis Example

Here's a simple of example of discounted cash flow analysis for a real estate transaction. First, imagine you purchase a piece of property for $500,000. Then you spend a year developing the property by building a small office mall and invest another $750,000 in the process. During the second year, you are able to lease all four offices for $5000 per month each, generating an income of $240,000. You do this for 5 years and then decide to sell the property for $1,500,000.

The cash flow series in this cash flow analysis of real estate looks like this:

real estate DCF analysisCF0 :  ($500,000)
CF1 :  ($750,000)
CF2 :   $240,000
CF3 :   $240,000
CF4 :   $240,000
CF5 :   $240,000
CF6 :   $240,000
CF7 : $1,500,000

Is this a good investment? Does it make sense to do this? Or would it be better to simply invest the funds in CDs?

Of course, the answer is, "It depends!"  The most significant factor apart from the specific cash flows is the amount of money you might earn by investing in Certificates of Deposit.  In this example, the amount of interest you could earn by investing in CDs is called the Discount Rate.  If the real estate investment will earn less than a less risky investment in a CD, then it doesn't make sense to do the project.  However, as this example shows, it would take a CD with an unbelievable return to equal the potential profit in this real estate example.

Here's the DCF Analysis ...

The Internal Rate of Return in this DCF example is more than 17%!  Click here to see a full-size screen shot of the DCF analysis as calculated by Discounted Cash Flow Analysis Calculator.

Of course, you can use the button below to download a fully-functional trial version of Discounted Cash Flow Analysis Calculator and play with real estate DCF calculations.

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