DCF for Capital Projects in Condo Association

Discounted Cash Flow
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Discounted Cash Flow > Best Practices

Vladimir Shnaydman
QUESTION: Hi, Condo association is planning roof replacement ten years from now. Today estimations are $1M. Should discounting be applied to this project? It means that future cost of the project would be 1M/(1+disc. rate)^10. Is it correct? Thank you. (...) Read more? Sign up for free

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  Rishi R Koirala, Teacher, Nepal
 

DCF for Capital Projects in Condo Association

The Present Value of your cost in the tenth year would be as your calculation, you are correct!
You can check the present value you calculated to get 1M by doing:
PV * (1 + dusc. Rate)^10.
It assumes that interest earned by PV each year is reinvested at same earning rate.

  Nick Moore, Financial Consultant, United Kingdom
 

Present Value of a Future Value

If the question is "what is the present cost of a roof replacement in ten year's (or any future period)?" then the answer is $1m, as inflation will increase the cost and discounting will bring it back down again.
It gets more complex if there is lots of uncertainty around whether the roof replacement will actually happen, but I would stick to the simpler rule above.

 
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