Sensitivity analysis in a DCF is used to:
Correct Answer
C) Show how the conclusion moves as key assumptions vary
Why this is correct: Sensitivity analysis tests how the discounted cash flow (DCF) value conclusion changes when key assumptions (like growth rate, vacancy, or cap rate) vary. It shows the model's robustness and provides a value range. Why the other choices are wrong: "Calculate the required debt coverage ratio" is a financing metric, not a DCF sensitivity test. "Determine the property's assessed value" is for tax purposes, not DCF. "Establish the effective date of the appraisal assignment" is a separate requirement. Exam tip: Sensitivity analysis answers 'what if?' to show value stability across different assumptions.
Why This Is the Correct Answer
Why this is correct: Sensitivity analysis tests how the discounted cash flow (DCF) value conclusion changes when key assumptions (like growth rate, vacancy, or cap rate) vary. It shows the model's robustness and provides a value range. Why the other choices are wrong: "Calculate the required debt coverage ratio" is a financing metric, not a DCF sensitivity test. "Determine the property's assessed value" is for tax purposes, not DCF. "Establish the effective date of the appraisal assignment" is a separate requirement. Exam tip: Sensitivity analysis answers 'what if?' to show value stability across different assumptions.
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Previous Question
In developing a market-derived overall capitalization rate via direct capitalization, an appraiser identifies a sale of a comparable apartment property where the seller provided $150,000 in seller financing at 4.5% interest-only for five years, while market conventional financing terms were 6.25% interest-only. The sale price was $2,100,000. To isolate the effect of favorable financing on the indicated cap rate, the appraiser calculates the present value of the financing benefit using a 6.25% discount rate. What is the approximate amount of the financing premium that must be subtracted from the sale price to estimate the cash-equivalent sale price?
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A GRM built from monthly rents cannot be applied to annual rent because: