Discount Rate

The discount rate may be viewed at the bottom-left corner of the main DCF sheet.  There is a link to this section under the Discounted Cash Flow tab. 

Note that the discount rate tool can also be activated from the Financing & Value Indicators sheet. This is a handy place to experiment with different discount rates, as you can see the various indicators change in the background. 

The discount rate represents the rate at which all future net incomes are converted to a present value. It is a yield rate as opposed to a capitalization rate, and reflects a return on the amount invested. For example, if a property is purchased with cash (no debt), the discount rate is synonymous with the investors desired yield, or internal rate of return (IRR). 

Discount rates tend to be dynamic when a series of irregular cash flows are projected, where the timing and amount of the cash flows influence the yield rate of the property. Discount rates are difficult to develop by formula, but can be solved for via an iterative process. As a rough rule of thumb, discount rates tend to be a point or two higher than the corresponding capitalization rate.

Setting the discount rate works the same as the cap rate and resale expense. Simply select the change increment and increase or decrease the rate accordingly. 

The discount rate is increased or decreased by .1%, .25%, .5% or 1%. Or, to enter a different rate, check the check box and enter a rate directly. Note the summary of values and rates of change. These indicators are helpful for keeping an eye on total value change over the holding period so one can assess the reasonableness of the estimated resale value.