How it works
The cash flow is the list of money in and out by year. Write that list first.
- Ask what else the firm could do with the cash. That is one way people pick a rate.
- Some teams use a cost of capital. Some use a simple hurdle they already use for projects.
- Do not invent a precise rate from thin air and then treat it as fact.
- Run the same leases at two or three nearby rates and show if the rank holds.
Formula in words. Later cash today = later cash / (1 + discount rate) to the power of the year.
| Input | Meaning |
|---|---|
| Candidate rate | The main rate you will show |
| Low test | A nearby lower rate |
| High test | A nearby higher rate |
| Lease cash | The same occupancy cash in every test |
Worked example
Here is a teaching sample. It is not customer data and not a result from a live client.
| Metric | Lease A | Lease B |
|---|---|---|
| Start rent | $38,000 | $35,340 |
| Year-1 extras | $10,000 | $10,700 |
| Year-1 credit | $8,000 | $4,400 |
| Sample NPV | $371,164 | $358,569 |
| Year | Rent | Extras | Credit | Cash out | Value today |
|---|---|---|---|---|---|
| Year 1 | $38,000 | $10,000 | $8,000 | $40,000 | $37,037 |
| Year 2 | $39,900 | $10,300 | $0 | $50,200 | $43,038 |
| Year 3 | $41,895 | $10,609 | $0 | $52,504 | $41,679 |
| Year 4 | $43,990 | $10,927 | $0 | $54,917 | $40,366 |
| Year 5 | $46,189 | $11,255 | $0 | $57,444 | $39,095 |
| Year 6 | $47,575 | $11,593 | $0 | $59,168 | $37,286 |
| Year 7 | $49,002 | $11,941 | $0 | $60,943 | $35,560 |
| Year 8 | $50,472 | $12,299 | $0 | $62,771 | $33,913 |
| Year 9 | $51,986 | $12,668 | $0 | $64,654 | $32,343 |
| Year 10 | $53,546 | $13,048 | $0 | $66,594 | $30,846 |
| Sample NPV | — | — | — | — | $371,164 |
How to read the sample
Sample NPV for the rate-test lease is about $371,164. A second path lands near $358,569. That gap is a talking point, not a promise.
A small credit lands early. If one path wins only because a credit sat in the wrong year, start over.
Year notes for the rate-test lease
- Year 1 of the rate-test lease has rent of $38,000.
- Shared building cost is $10,000.
- A credit of $8,000 lowers the cash you pay that year.
- Cash out this year is about $40,000. A small credit lands early.
- Later cash gets a shrink for time. At 8 percent, year 1 is worth about $37,037 today.
- Next, year 2 rent is $39,900.
- CAM, which is a shared building cost, is $10,300.
- There is no credit in this year.
- You pay about $50,200 this year after extras and credits. The step-up is the point of this sample.
- Time shrinks later cash. At 8 percent, year 2 is worth about $43,038 today.
- Then year 3 rent is $41,895.
- Extras for the building come to $10,609.
- Credits skip this year.
- The net cash this year is about $52,504. Later years get heavier if the rate is low.
- Waiting has a price. At 8 percent, year 3 is worth about $41,679 today.
- After that, year 4 rent is $43,990.
- The shared building cost this time is $10,927.
- No extra credit shows up this year.
- Cash out this year is about $54,917. A high rate shrinks these years hard.
- Later cash gets a shrink for time. At 8 percent, year 4 is worth about $40,366 today.
- In year 5 of the rate-test lease, rent is $46,189.
- Shared building cost is $11,255.
- There is no credit in this year.
- You pay about $57,444 this year after extras and credits. The last year is where rate fights show up.
- Time shrinks later cash. At 8 percent, year 5 is worth about $39,095 today.
- Year 6 of the rate-test lease has rent of $47,575.
- CAM, which is a shared building cost, is $11,593.
- Credits skip this year.
- The net cash this year is about $59,168. Keep this later year in the sum for the sample.
- Waiting has a price. At 8 percent, year 6 is worth about $37,286 today.
- Next, year 7 rent is $49,002.
- Extras for the building come to $11,941.
- No extra credit shows up this year.
- Cash out this year is about $60,943. The row still belongs in the sum for the long path.
- Later cash gets a shrink for time. At 8 percent, year 7 is worth about $35,560 today.
- Then year 8 rent is $50,472.
- The shared building cost this time is $12,299.
- There is no credit in this year.
- You pay about $62,771 this year after extras and credits. Keep this later year in the sum for the long path.
- Time shrinks later cash. At 8 percent, year 8 is worth about $33,913 today.
- After that, year 9 rent is $51,986.
- Shared building cost is $12,668.
- Credits skip this year.
- The net cash this year is about $64,654. The row still belongs in the sum for the long path.
- Waiting has a price. At 8 percent, year 9 is worth about $32,343 today.
- In year 10 of the rate-test lease, rent is $53,546.
- CAM, which is a shared building cost, is $13,048.
- No extra credit shows up this year.
- Cash out this year is about $66,594. Keep this later year in the sum for the long path.
- Later cash gets a shrink for time. At 8 percent, year 10 is worth about $30,846 today.
Add those year values. The sample NPV for the rate-test lease is about $371,164. This is a teaching sample, not a client result.
Trusted sources
These are public references. They are not endorsements and not client results.
How to use this with OccupancyNPV
This page answers the concept. OccupancyNPV applies it inside a DealWorkspace: enter lease scenarios, review cash-flow and occupancy cost, then compare NPV and discount-rate sensitivity. OccupancyNPV NPV is not the same as a face-rent comparison. OccupancyNPV is not a CRM or lease-administration suite, and this page is not legal or investment advice.
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