Discounted cash flow analysis differs from direct capitalization in that DCF:
Correct Answer
C) Models a series of periodic cash flows plus a reversion
Why this is correct: Discounted Cash Flow (DCF) analysis projects and discounts a series of future periodic cash flows and a reversion value, unlike direct capitalization which uses a single year's income, as explained originally. Why the other choices are wrong: "Uses one stabilized year of income to conclude a value" describes direct capitalization, not DCF. "Applies only to properties with no existing leases in place" is incorrect; DCF can model existing leases. "Eliminates the need to forecast future market conditions" is false; DCF requires forecasting. Exam tip: DCF models multiple future periods; direct capitalization uses a single year.
Why This Is the Correct Answer
Why this is correct: Discounted Cash Flow (DCF) analysis projects and discounts a series of future periodic cash flows and a reversion value, unlike direct capitalization which uses a single year's income, as explained originally. Why the other choices are wrong: "Uses one stabilized year of income to conclude a value" describes direct capitalization, not DCF. "Applies only to properties with no existing leases in place" is incorrect; DCF can model existing leases. "Eliminates the need to forecast future market conditions" is false; DCF requires forecasting. Exam tip: DCF models multiple future periods; direct capitalization uses a single year.
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An appraiser is estimating the market rent for a warehouse property. Comparable leases show net rents, and the subject's operating expense ratio is 35%. To develop a potential gross income estimate on a gross basis (for a gross income multiplier analysis), the appraiser should:
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A lease that requires the tenant to pay a share of expenses above a base-year amount contains: