Help me understand the WACC in the context of a real estate investment


Hi everyone

As I understand it, when doing a DCF analysis of an investment, we usually don’t take into account debt in the FCF but rather discount at a rate that takes into account the cost of debt: the WACC.

For a real estate deal, this would look something like this:

In this easy example, given the rental level, the expected exit price and the required returns, the value of the asset (i.e. NPV =0) is calculated to be 8.341 m€.

However, if I calculate the same investment opportunity but I take into account the loan into the cash flow computation and then discount using the required return on equity, then the asset is worth less (or at the same price, my NPV is < 0).

I thought that these calculation methods were suppose to return the same result?

Would somebody kindly explain where I went wrong 🙂


In: 2

For scenario 2 the interest repaid yearly is constant. Is that true for this type of loan? Or maybe it doesn’t matter as it’s just averaged out and there is no excess repayment?

Should the Discount Factor be lower in scenario 2?

Difficult to look over it on mobile. I’ll try recreate your spreadsheet on my own and see what’s up.