Calculating NOI when using INCOME approach and Discounted CF approach

CFA Level I
#1

When calculating Net Operating Income (NOI) using Income approach, we do not deduct the depreciation from the Gross potential income. But when calculating the After-tax cash flow using the ‘Discounted Cash flow’ approach, we subtract depreciation. Depreciation is classified as an expense? I am confused why one includes it in the calculation and the other doesn’t. Can someone enlighten me please?

#2

One takes taxes into consideration (income approach) the other does not. Depreciation is a non cash flow expense. For the Discounted income approach you subject it out but then add it back in after taxes

#3

When you say “One takes Tax into consideration”, do you mean deducting it from the Income? Using “Income approach”, we deduct taxes from the Gross potential income when calculating the NOI. So this gives us after-tax (we considered tax here right?) Using “Discounted income approach”, After-tax net income = (NOI – depreciation – interest pmt)*(1- tax rate) So both of them do take tax in to consideration? Am I missing something?

#4

Discounted approach After-tax net income = (NOI – depreciation – interest pmt)*(1- tax rate) Then you add back depreciation. For income approach you take out property taxes, not the investors taxes. Income approach is EBIT + Depreciation

#5

okok so the NOI we are calculating using Income Approach is really a cash flow number like the perpetuity method to price the property…

#6

yea

#7

I got really confused on this one also

#8

JP_RL_CFA Wrote: ------------------------------------------------------- > Discounted approach > > After-tax net income = (NOI – depreciation – > interest pmt)*(1- tax rate) > > Then you add back depreciation. > > For income approach you take out property taxes, > not the investors taxes. > > Income approach is EBIT + Depreciation For income apprach, we ignore depreciation and financing costs, and consider everything else which gives NOI. Why would you add depreciation back?

#9

depreciation is a non cash expense… therefore we need to include it in the Cash flow.

#10

Sabaruch, you would ignore depreciation if you started from sales and started subtracted out the expenses but if you start with EBIT you have to add back in depreciaton.

#11

JP_RL_CFA Wrote: ------------------------------------------------------- > Sabaruch, you would ignore depreciation if you > started from sales and started subtracted out the > expenses but if you start with EBIT you have to > add back in depreciaton. ohhh, thanks.