A discount rate for a DCF may be supported by:
Correct Answer
C) Investor surveys and rates extracted from comparable sales
Why this is correct: A discount rate in a Discounted Cash Flow (DCF) analysis must reflect the market's required rate of return for an investment with similar risk. This is empirically supported by data from investor surveys and by extracting rates from comparable sales where income and resale projections are known. Why the other choices are wrong: The client's own required rate of return is subjective and not market-derived. Historical appreciation alone reflects past price changes, not the required future return. The prime lending rate by itself is a borrowing cost, not a property investment yield metric. Exam tip: DCF discount rates must be market-supported, not client-specific or based on lending rates.
Why This Is the Correct Answer
Why this is correct: A discount rate in a Discounted Cash Flow (DCF) analysis must reflect the market's required rate of return for an investment with similar risk. This is empirically supported by data from investor surveys and by extracting rates from comparable sales where income and resale projections are known. Why the other choices are wrong: The client's own required rate of return is subjective and not market-derived. Historical appreciation alone reflects past price changes, not the required future return. The prime lending rate by itself is a borrowing cost, not a property investment yield metric. Exam tip: DCF discount rates must be market-supported, not client-specific or based on lending rates.
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Previous Question
An appraiser estimates the reversion value for a retail center using a terminal capitalization rate of 7.0%. The projected NOI for Year 11 (the first year after the 10-year holding period) is $385,000. The appraiser then discounts the reversion value back to present value using a yield rate of 8.5%. What is the present value of the reversion?
Next Question
Using the band of investment: 70% of the capital is debt with a mortgage capitalization requirement of 8%, and equity requires 11%. The overall rate is: