An appraiser is developing a discounted cash flow (DCF) analysis for a commercial property with a 7-year holding period. The projected net operating income (NOI) for Year 7 is $210,000, and the estimated reversion (sale proceeds net of transaction costs) at the end of Year 7 is $3,200,000. Using a discount rate of 9.5%, what is the present value of the Year 7 reversion component alone?
Correct Answer
C) $1,712,394
The present value of the reversion is calculated using the formula: PV = FV / (1 + r)^n. Here, FV = $3,200,000, r = 9.5% = 0.095, n = 7. So PV = 3,200,000 / (1.095)^7. First compute (1.095)^7 ≈ 1.8704 (using calculator or standard financial tables). Then 3,200,000 ÷ 1.8704 ≈ 1,712,394. This matches option C. USPAP Advisory Opinion 21 states that DCF analyses must apply appropriate discount rates to all future cash flows—including reversion—to estimate present value, and the reversion must be discounted over the full holding period, not just the NOI stream. The NOI for Year 7 is irrelevant to this calculation because the question asks only for the present value of the reversion component.
Why This Is the Correct Answer
The present value of the reversion is calculated using the formula: PV = FV / (1 + r)^n. Here, FV = $3,200,000, r = 9.5% = 0.095, n = 7. So PV = 3,200,000 / (1.095)^7. First compute (1.095)^7 ≈ 1.8704 (using calculator or standard financial tables). Then 3,200,000 ÷ 1.8704 ≈ 1,712,394. This matches option C. USPAP Advisory Opinion 21 states that DCF analyses must apply appropriate discount rates to all future cash flows—including reversion—to estimate present value, and the reversion must be discounted over the full holding period, not just the NOI stream. The NOI for Year 7 is irrelevant to this calculation because the question asks only for the present value of the reversion component.
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