Using Future Cash Flows in a Financial Analysis Business Proposal

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investment in a rental/real estate property. There is a one-time purchase of $10,000 in land that can subsequently be rented for a yearly $3,500 rent for a period of several years. At the end of the rental period, the investor aims to sell the land for a certain price. The longer the period of the rental is, in number of years, the more the land will degrade and, as a consequence, will be valued at a lower sum at the end of the entire period of time.

As a consequence, the several scenarios that will be taken into consideration will look at a comparison between longer years of rental vs. lower price for the final sale of the land or a shorter period for the rental period, but a higher price for the final sale at the end of the rental period.

This paper will look at three different scenarios that will be analyzed according to criteria such as the net present value (looking at present worth and future worth and discounting future worth in order to obtain present worth), the internal rate of return (IRR) and other methods that include the cost effectiveness and benefit-cost instruments. The conclusion should be able to summarize as to which of the three scenarios is the optimal for the investor.

Another important element that needs to be defined is the discount rate that will be used in all the different calculations. The discount rate will be equivalent to the cost of capital, namely how much it would cost to receive a loan in order to pay for the investment in the rental property. The assumption for the rest of this paper is that this discount rate/cost of capital will be equal to 12%, which, in the Excel sheets, will be shown as 0.12.

For the first part of the paper, the hypothesis will be described for each of the three scenarios.

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Scenario A

The investment in the rental property is worth $10,000. This will be shown in the financial analysis as Year 0. Each of the first three years of the renting the property produces an even $3,500 per year (Year 1, Year 2 and Year 3). The property will be sold in the 4th year for $3,500. This will be the result of the property gradually depreciating through time and losing its value as it has been more and more used during the rental period.

Scenario B

The investment in the rental property is worth $10,000. This will be shown in the financial analysis as Year 0. Each of the first three years of the renting the property produces an even $3,500 per year (Year 1, Year 2 and Year 3). The property will be rented for another 2 years for $3,500. However, this will result in the property been more damaged at the end of the rental period, which will mean that it can only be sold for $$1,500 in the last year (Year 6), which will be the recorded cash flow for the respective year.

Scenario C

The investment in the rental property is worth $10,000. This will be shown in the financial analysis as Year 0. In this scenario, the property will only be rented out for three years and will be sold in Year 3 for a larger sum, the result of the property being less deteriorated over the rental period. The property will be sold in Year 3 for $4,500, which will be the cash flow for Year 3.

To resume, here are the following three scenarios that will be analyzed using the method previously mentioned in the introduction

Scenario A

Year

Cash Flows

0

($10,000)

1

$3,500

2.....

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"Using Future Cash Flows In A Financial Analysis" (2014, August 03) Retrieved June 4, 2026, from
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