Evaluation Details and Structure Flashcards
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Read the first 7 Evaluation Details and Structure flashcards as text
In ARGUS DCF analysis, what does the 'reversion value' represent?
Answer: The estimated sale proceeds at the end of the holding period
The reversion value (also called terminal or residual value) is the estimated net sale proceeds received when the property is sold at the end of the analysis holding period.
How is the terminal cap rate used differently from the going-in cap rate in ARGUS?
Answer: Going-in cap rate values the property at acquisition; terminal cap rate estimates the reversion value at the end of the holding period
The going-in cap rate determines the entry valuation, while the terminal cap rate is applied to the final year NOI (or year-after NOI) to estimate the property's sale price at the end of the holding period.
Which ARGUS input most directly controls the length of the discounted cash flow projection?
Answer: Holding period (analysis period)
The holding period (analysis period) defines how many years of cash flows ARGUS projects before calculating the reversion value.
When ARGUS calculates IRR, what two components of return does it combine?
Answer: Periodic cash flows during the holding period and the net reversion proceeds at sale
IRR in ARGUS reflects the time-weighted return from both the annual cash flows received during the hold and the net sale proceeds (reversion) at the end.
In ARGUS, the going-in cap rate is applied to which cash flow metric to derive property value?
Answer: Net Operating Income (NOI)
Value = NOI ÷ Cap Rate; ARGUS applies the going-in cap rate to the stabilized or Year 1 NOI to derive the implied property value at acquisition.
What happens to the discount rate in ARGUS if a property is considered to have higher investment risk?
Answer: The discount rate increases to reflect a higher required return for the added risk
Higher perceived risk requires investors to demand a higher return, so a higher discount rate is applied, which reduces the present value of future cash flows.
In a standard ARGUS evaluation, which year's NOI is typically capitalized to estimate the terminal (reversion) value?
Answer: The NOI of the year immediately following the end of the holding period
ARGUS conventionally capitalizes the NOI of the year just after the holding period ends (often called 'Year n+1') to reflect what a future buyer would underwrite.