The reversion in a discounted cash flow model represents:
Correct Answer
D) The proceeds from selling the property at the horizon
Why this is correct: In a DCF model, the reversion is the estimated net sale proceeds at the end of the holding period, often derived by capitalizing the following year's income at a terminal cap rate. Why the other choices are wrong: "The return of the original equity investment at closing" describes equity payback, not reversion. "The lender's balloon payment due at loan maturity" refers to debt, not property sale proceeds. "The accumulated depreciation over the holding period" is an accounting concept, not a cash flow. Exam tip: Reversion captures future sale value; it's a critical component in DCF, so support the terminal cap rate robustly.
Why This Is the Correct Answer
Why this is correct: In a DCF model, the reversion is the estimated net sale proceeds at the end of the holding period, often derived by capitalizing the following year's income at a terminal cap rate. Why the other choices are wrong: "The return of the original equity investment at closing" describes equity payback, not reversion. "The lender's balloon payment due at loan maturity" refers to debt, not property sale proceeds. "The accumulated depreciation over the holding period" is an accounting concept, not a cash flow. Exam tip: Reversion captures future sale value; it's a critical component in DCF, so support the terminal cap rate robustly.
More Income Approach Questions
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In a DCF, what is the reversion?
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The mortgage constant represents:
Applying a GRM of 164 to a subject renting at $2,650 monthly indicates a value of:
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