Key takeaways
- Each metric answers a different question: NPV shows the value added, IRR the rate, MOIC the multiple, and payback the time.
- No single metric is enough. Read them as a set, and always state which level of cash flow they are calculated from.
- Profit on Cost and profit margin are different measures. Mixing them up makes returns look better than they are.
NPV and discount rate
NPV = Σ [CFt ÷ (1 + r)^t] − initial investment
| NPV | Interpretation | Decision |
|---|---|---|
| Greater than 0 | Creates more value than the cost of capital | Go |
| Equal to 0 | Return equals the cost of capital | Marginal |
| Less than 0 | Does not create value | No-Go |
The discount rate must match the cash flow being discounted. Project-level cash flow uses a risk-adjusted WACC, typically around 10–15% for medium risk. Equity-level cash flow uses the cost of equity, which for development work is usually around 15–20%.
What to check in every model Excel's NPV function discounts the first-period cash flow by one period. If the first period is today's investment, the result will be slightly lower than the true figure. In the SARARN SUK case study, NPV at 10% is THB 54.1 million using Excel's method and THB 59.5 million if the first period is treated as time 0. Always state this assumption.
MOIC
MOIC = total distributions ÷ total investment
MOIC shows how many times the money has multiplied. It is easy to understand but ignores time: 2x in 3 years and 2x in 10 years give the same value. Always read it together with IRR.
| MOIC | Interpretation | Typical risk level |
|---|---|---|
| Below 1.5x | Low | Rarely seen in approved projects |
| 1.5–2.0x | Acceptable | Low risk |
| 2.0–2.5x | Good | Medium risk |
| 2.5–3.0x | Very good | Medium to high |
| 3.0x and above | Outstanding | High risk, or good timing |
Cash-on-Cash Return
Cash-on-cash = annual cash flow ÷ total cash invested
Used for income-generating assets such as hotels or rental buildings. It is of little use for sell-out projects. The typical target for stabilised assets is around 8–15%, and it does not reflect the time value of money.
Example With cash invested of THB 100 million and annual cash flow after debt of THB 12 million, cash-on-cash is 12%.
Payback
Payback = the time until cumulative cash flow returns to zero
- Simple payback is easy to understand but ignores cash received after payback and the time value of money. The typical target for development projects is under 5–6 years.
- Discounted payback uses discounted cash flows, so it is always longer than simple payback. The typical target is under 6–7 years.
If you use annual periods, interpolate within the year in which payback occurs, and state that it is counted from the start of the first period.
Profit on Cost and profit margin
Profit margin = profit ÷ revenue
Used for comparison with industry averages and financial statements.
Profit on Cost = profit ÷ cost
Used to assess development projects, because the decision is based on the money that has to be put in.
A profit margin of 25% equals a Profit on Cost of 33.3%. Typical development targets are around 20–40% (below 15% is not worth the risk, 15–25% is acceptable, 25–35% is the normal market level, and 35–45% is very good). These figures are reference values from the author's experience.
Residual Land Value
RLV answers the question of the maximum you can pay for the land, starting from the value the project can create.
RLV = total revenue − development cost − target profit − overhead − finance cost
Example A sample 50-key wellness project, in THB million
| Total revenue | 1,800 |
| Construction costs | (800) |
| Soft Cost | (100) |
| Marketing and pre-opening | (80) |
| Target profit at 20% of revenue | (360) |
| Finance costs | (120) |
| Contingency | (40) |
| Residual Land Value | 300 |
If the landowner asks for more than the RLV, walk away from the negotiation or revise the product and assumptions; do not lower the target profit just to make the numbers work. If you secure a price below the RLV, profit increases by the difference.
Hurdle rate by project type
Hurdle Rate = Cost of Capital + Risk Premium
This table is a reference framework from the author's experience of Thai real estate. Use it as a starting point and adjust it for your cost of funds and the market.
| Project type | WACC | Risk Premium | Hurdle (Project IRR) |
|---|---|---|---|
| Stabilized Income | 8–10% | 2–3% | 10–13% |
| Build-to-Rent | 9–11% | 3–4% | 12–15% |
| Condo Mid-market Bangkok | 10–12% | 5–7% | 15–19% |
| Condo Luxury Bangkok/Phuket | 10–12% | 7–10% | 17–22% |
| Villa Luxury Phuket/Samui | 10–12% | 8–12% | 18–24% |
| Hotel Development | 11–13% | 8–10% | 19–23% |
| Wellness/Medical Resort | 11–13% | 10–14% | 21–27% |
| Mixed-use Large | 11–13% | 10–14% | 21–27% |
| Greenfield Innovative | 12–15% | 13–20% | 25–35% |
| Distressed Turnaround | 12–15% | 15–25% | 27–40% |
A hurdle that is too high means missed opportunities; one that is too low means taking on more risk than you can bear. Review it every 1–2 years and use different thresholds for different project types.
Exit valuation for held assets
- Cap rate Value = NOI ÷ cap rate. Used for stabilised assets. Choose the cap rate from recent transactions of the same type of asset.
- Comparable sales Adjust the price per sq m from actual transactions. This is closest to the market, but requires enough data.
- DCF PV of cash flows plus terminal value. Flexible, but sensitive to assumptions.
| Asset type (author's reference values) | Cap Rate |
|---|---|
| Grade A office, Bangkok CBD | 6.0–7.0% |
| Grade B office, Bangkok | 7.0–8.5% |
| Shopping Mall Prime | 6.5–8.0% |
| 5-star hotel, Bangkok/Phuket | 7.0–9.0% |
| 4-star hotel | 8.0–10.0% |
| Rental accommodation, Bangkok | 4.5–6.0% |
| Logistics warehouse | 6.5–8.0% |