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Discuss factors which determine the reversionary value when using DCF valuation approach.

Discuss factors which determine the reversionary value when using DCF valuation approach.

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Answer #1

While doing DCF valuation, we need to find the Terminal value of the asset at the end of the expiration of the time period for which we are trying to project the cash flows of the property. There has to be some Terminal value (Reversionary Value) to get the correct NPV, IRR for the property / asset.

Various factors that decide the reversionary value are as follows

- Cap rate of the similar asset

- Growth rate of the future cash flows

With these 2 variables knows, one can find the reversionary value which is next years cash flows (Here growth is required) divided by the cap rate for similar asset.

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