ProCash, an Economic Model for Income Properties

Valuation & ROI: Total Project

The simplest way to value a project is to capitalize debt free income with a capitalization rate that reflects the quality of the project and the sorts of returns that investors are seeking in the current market. The debt free income to be capitalized might be pro forma income, as in the determination of the mortgage amount up front, or it might be the most recent year's income, as in the determination of the residual value for the ending sale. (AVI[112] is used to determine project value for original financing and refinancing while AVI[113] is used to determine value at the ending sale.)

Discounted cash flow is another means for determining value and it has the advantage of dealing appropriately with year by year differences. The value of the project as a whole is determined by inputing a debt free discount rate as AVI[114]. This discount rate will be applied to the sum of "capital accounts before financing" and "net available for debt service" to determine the value of the project. This cash flow line is the same as project cash flow. All three of these cash flow lines are reported on format 420.

Capitalized value is always determined in ProCash© on the basis of "net available for debt service". Capital improvements are (in the ProCash© viewpoint) often discretionary and irregular. "Debt free basis" in ProCash© usually means after discretionary capital improvements though at the broadest conceptual level this distinction may be ignored for reasons of semantic simplicity.

AVI[114]DCF Valuation Rate (total project)64300

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