A holding period in a DCF is typically chosen to reflect:
Correct Answer
A) A typical investor's expected ownership span
Why this is correct: In a Discounted Cash Flow (DCF) analysis, the holding period represents the typical investment horizon for a property type in that market, such as 5 or 10 years. It reflects investor behavior, not physical or financial constraints. Why the other choices are wrong: The holding period is not necessarily tied to the remaining economic life of improvements, the existing mortgage term, or the depreciation schedule. Exam tip: The holding period choice directly impacts the terminal (reversion) value's present value weight.
Why This Is the Correct Answer
Why this is correct: In a Discounted Cash Flow (DCF) analysis, the holding period represents the typical investment horizon for a property type in that market, such as 5 or 10 years. It reflects investor behavior, not physical or financial constraints. Why the other choices are wrong: The holding period is not necessarily tied to the remaining economic life of improvements, the existing mortgage term, or the depreciation schedule. Exam tip: The holding period choice directly impacts the terminal (reversion) value's present value weight.
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Previous Question
An appraiser develops two DCF models for the same industrial warehouse: Model A uses a 6.0% yield rate and a 5.5% terminal cap rate; Model B uses a 7.2% yield rate and a 6.8% terminal cap rate. All other assumptions (NOI projections, holding period, reversion timing) are identical. Assuming both models are properly constructed, what is the most likely effect on the indicated value?
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Applying a GRM of 164 to a subject renting at $2,650 monthly indicates a value of: