REIT Discounted Cash Flow valuation model, part 3, Present Value of Free Cash Flows. Now that we have our free cash flows, we can discount them back to the present using our pre-calculated WACC. Again, I'm going to hide C, D and E.

I have discount periods set up which I will utilize in my formula. You can use an MPV formula in Excel. I prefer to break it out this way, I just think it's less of a of a black box calculation. If we can see the actual discounting happen, it allows us to continue to do sanity checks throughout the model. Our weighted average cost of capital has already been calculated above. We're going to link to that and I've actually named the cell as my WACC. By doing that, I don't have to keep arrowing around the page and I can also use the formula without having to use an absolute reference. I'll copy my WACC across and now I can calculate the discount factor. The discount factor is simply going to be one over one plus the WACC raised to the exponent of the discount period that we are in. Copy that across, and I can now apply that discount factor to my free cash flows. (keyboard clicking) We could use a mid-year adjustment, which would basically assume that the cash flows happen halfway through the year as opposed to all at the end of the year. Some analysts believe that this is the proper thing to do and the more realistic thing to do, and some people are of the opinion that that doesn't really affect the valuation that much unless you're going out really a very long time. I leave that up to you to decide. If you wanted to do that, we would simply change our discount periods from 1 to 0.5, 1.5, 2.5, et cetera, for right now I'll just leave them as whole years.