4Scenario Analysis: Future Scenarios can Significantly and Surprisingly Affect the Present Value
This chapter presents an initial example of how we can identify hidden value using the DCF model to analyze scenarios. It provides a first demonstration of the value of flexibility. We quantify the added value we can obtain by modeling our management of properties to respond to downside and upside contingencies. The example we use is a simplified consideration of when to resell the property that we’re evaluating.
4.1 Discounted Cash Flow Scenario Analysis
Let’s now look at more than just the mean of the future cash flow, more than just the single‐stream pro forma. We can learn a lot by looking at what might actually occur in the future. A good first step for doing this is to think about future cash flow “scenarios” rather than just a single expectation. A scenario analysis can reveal important management possibilities or dangers. This enlightenment can lead the analyst to revise the original pro forma or asset valuation, especially (perhaps) from a private valuation perspective.
Let’s take a simple example that builds on the DCF ...