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Residual, Discounted and Period by Period Method of Valuation

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The existence of residual, discounted cash flow and period by period simply gives the developer a means of maximising their profits. Comment.

The application of residual, discounted cash flow and period-by-period approaches to development appraisal simply gives developers opportunity to maximise their profit.

Residual method is based on a simple economic concept – land value is a surplus after estimated development costs (including expected profit) have been deducted from the estimated value of the completed development. It does not deal with sufficient sensitivity with costs and income occurring at different stages of development. In practice the method is first employed in its simplest form and then the complexity level increases as development plans crystallise.

Discounted Cash flow (DCF) approaches are widely used in development appraisal to accurately reflect the timing of development expenditure and revenue so that the finance costs can accurately reflect the net cash flows or amount that needs to be borrowed at each stage of the development. For large schemes with a lengthy development period, or for even larger schemes where phased development is likely, the effect of inflation needs. DCF assumes 100% equity funding so no interest calculations but it is unlikely in practice. It also does not allow for separate developer’s profit.

The ‘Period by Period’ method (PBP) employs a simple allocation of costs and values to time slots. Negative cash flows typically give way to positive ones. Later positive cash flows can reduce interest costs. PBP shows the outstanding debt figure throughout. It enable valuers to be explicit about the breakdown of costs and revenue, providing a reasonably accurate assessment of monetary flow over a specified time period
It is clear that the accuracy of any method depends to a great extent on the comparable evidence that can be…...

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