Why is Discounted Cashflow Analysis important?
The value of any given investment is the sum of the cash flows it will generate in the future. In adding up these cash flows, it’s extremely important to take into account the “time value of money”, because, to put it in simple terms, a dollar received five years from now is less valuable than a dollar received now. In analyzing your investment property, the most relevant measure of performance is the cash flow you will receive from the investment, whether it’s the monthly cash left over after paying the mortgage, insurance, and taxes, the tax benefit of yearly losses, or the cash proceeds you take home when you sell the property, and the value of these cash flows to you at the present moment.
