Discounting Negative Cash Flow

[BigBlueGA]

I've got my fire suit on, this is likely a stupid question but I've made the mistake of over-thinking this and now I've confused even myself.

I've come across my first project with a negative cash flow in the first period from development costs. How should it be discounted? The results of discussion about this with peers and even my usual CE instructor seem completely illogical. Even tried to go back through my books/class texts and they all seem to gloss right over this situation. There's a light switch somewhere in my head that just needs to be flipped on....

 

[Meandering]

Sunk costs, should be taken in the period they will happen.

Increase them if they will happen sometime in the future. There is no discount for expenses. Expenses increase in the future.

The AI has a seminar, subdivision analysis. It was one of the best courses I've ever had with them. If you can grab the seminar, take it. The book isn't as helpful on a stand alone basis.

 

[Terrel L. Shields]

If your final value in DCF comes out negative, the project is not feasible. If the ground had zero development and you have calculated the EP reasonably correctly, then the "as is" site value, imho, should be exactly the same as the DCF...otherwise, you are saying the land is more valuable simply because someone wants to build a subdivision...that's a future hypothetical situation.

 

[BigBlueGA]

If your final value in DCF comes out negative, the project is not feasible. If the ground had zero development and you have calculated the EP reasonably correctly, then the "as is" site value, imho, should be exactly the same as the DCF...otherwise, you are saying the land is more valuable simply because someone wants to build a subdivision...that's a future hypothetical situation.

This is a project which is partially developed, the overall cash flow is positive, it's only the first period of the DCF in which I have a negative cash flow due to the cost of completing development.

 

[Pittsburgh Pete]

I would suggest discounting the cash flows--they are achieved in the future--and then subtracting the development costs from the total present value. Development costs will be, theoretically, incurrred at the beginning of the project (no discounting needed) and not at the end of period 1.

PV of cash flows will give you value "as completed." Deducting development costs from that figure will give you value "as is."

 

[PL1957]

Ask yourself the question - "Would a potential purchaser discount the negative cash flows?" No chance ... they would take a dollar for dollar deduction regardless of whether it was in the first period, fifth period or fiftieth period.

 

[Phil Sarazen]

I'm not sure of the pattern of the cashflows you have but it sounds like you're saying you have development costs in period 0, a few periods of losses (are these due to absorption in the earlier months?), and some positive cashflows that follow. Is that correct?