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.
More Income Approach Questions
In a percentage lease, rent is commonly structured as:
In a DCF, what is the reversion?
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
Building A (new, credit tenant, 20-year lease) and Building B (older, month-to-month tenants) sell the same week. Their cap rates should differ how?
An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
Replacement reserves cover which kind of expenditure?
What is the primary distinction, for appraisal purposes, between 'vacancy loss' and 'collection loss'?
An appraiser is analyzing a mixed-use property with retail and office components. The retail segment has a potential gross income of $180,000 with a market vacancy of 8%. The office segment has a potential gross income of $120,000 with a market vacancy of 12%. What is the overall effective gross income for the property?
The mortgage constant represents:
People Also Study
Real Estate Market
13.6% of exam
Property Description
11.8% of exam
Land or Site Valuation
4.5% of exam
Sales Comparison Approach
16.4% of exam
Cost Approach
13.6% of exam