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Fb12

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Reply with quote  #1 
My question is if I determined absorption time of the remaining lots in the subdivision to be 72 months or six years when do you utilize discounting monthly versus yearly. I have so you use monthly discounting unless the lot sales are stable throughout the top. I am trying to determine whether to discount the remaining lots monthly or yearly
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johnmbryant

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Reply with quote  #2 
Let's assume 72 lots to be sold.
  1. Monthly discounting assumes you will close exactly 1 lot per month for the next 72 months.  This is an unlikely scenario.
  2. Annual discounting assumes you will close 12 lots on December 31 of each year.  This is an equally unlikely scenario.
  3. Monthly discounting will yield a higher present value than annual discounting.  Annual discounting is conservative since it assumes income at the end of the year.  Monthly discounting is aggressive since it assumes steady cash flows throughout the year.
The discounting method has no effect on value, only the opinion of value.  The lots are worth the same whether you discount by the month, by the year, or some other time frame.  Only the calculations change.  Your calculations are value indicators only.

What we have is three guesses that when combined create an opinion.  The discount rate is a guess.  The absorption rate is a guess.  The time frame is a guess.  Put these numbers into a HP12C or Excel spreadsheet and, viola, you have a value estimate.

To be conservative, I would opt for discounting on an annual basis.  There is a much better chance that I would be right.  Predicting the sale of one lot each and every month is above my pay grade.
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Fb12

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Reply with quote  #3 
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