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Discounted Cash Flows

Discounted Cash Flows, also known as Net Present Value of Discounted Cash Flows, is a valuation method which discounts future cash flows back to the present to estimate the attractiveness of a real estate investment.

For an income producing property, the discounted cash flows calculation would use the initial investment amount, a series of estimated yearly future after-tax cash flows, the after-tax sales proceeds in a given year and a discount rate determined by the investor. The discount rate used by the investor reflects the investment risk and anticipated return required to take that risk, or put simply, the investor enters the rate of return that he would like to make on the investment. A negative discounted cash flow/net present value would indicate that the investment doesn't meet investor expectations. A positive discounted cash flow indicates that the investment meets investor expectations. The larger the net present value, the better the investment.

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