What does a leveraged DCF analysis account for?

A leveraged discounted cash flow (DCF) analysis specifically incorporates the effects of debt financing when evaluating the investment potential of an asset. This type of analysis acknowledges how financing, such as mortgages or loans, impacts the cash flows generated by the property. The levered cash flows reflect the difference between the total cash inflows from the property and the cash outflows, including interest and principal repayments associated with the debt.

By factoring in debt financing, this analysis offers a clearer picture of the actual return on equity that investors can expect because it considers the benefits of leverage—such as the increased potential return on investment when utilizing borrowed funds—as well as the associated risks. Therefore, leveraging plays a crucial role in determining net cash flows and profitability when assessing the overall financial performance of the investment property.

In contrast, other options focus on aspects that do not directly pertain to how debt financing impacts the investment's value or projected cash flows. This is why a leveraged DCF is vital for investors seeking to understand the interplay between debt, cash flows, and overall investment returns.