When performing a discounted cash flow analysis, which cost should be accounted for in the initial investment?

When performing a discounted cash flow analysis, it's essential to account for all costs associated with the initial investment to accurately assess the viability and profitability of the investment. This includes various expenses that occur before the actual cash flow generation begins.

The purchase price is the most obvious component, as it represents the main cost incurred when acquiring the property or investment. However, due diligence costs, which cover expenses related to research, inspections, and analyses performed to evaluate the feasibility and risks associated with the investment, are also critical. Additionally, real estate commissions are fees paid to brokers for facilitating the transaction and should be included as they represent a necessary expense involved in the acquisition process.

By recognizing all these costs within the initial investment calculation gives a more comprehensive picture of the overall investment required. This holistic view ensures the discounted cash flow analysis reflects the true cost of entering the investment, thus aiding in making more informed decisions regarding its potential return on investment.