CAE Income Approach to Value 3

Question 1

In discounted cash flow (DCF) analysis, the 'discount rate' represents:

Accepted Answer

The required yield or total rate of return on the investment

Answer

The discount rate in DCF analysis is the required total rate of return (yield rate) used to convert future income streams and reversion to present value.

Question 2

The 'reversion' in a discounted cash flow analysis refers to:

Accepted Answer

The projected resale value (net proceeds) at the end of the holding period

Answer

The reversion is the estimated net proceeds from resale of the property at the conclusion of the assumed holding period, discounted to present value.

Question 3

When performing DCF analysis, terminal (going-out) capitalization rates are typically set HIGHER than going-in rates because:

Accepted Answer

The property will be older and perceived as riskier at the time of resale

Answer

A higher terminal cap rate reflects increased risk at resale due to the property's age, potentially shorter remaining economic life, and greater uncertainty about future income.

Question 4

Reserves for replacement are included in operating expenses in the income approach to account for:

Accepted Answer

Periodic replacement of short-lived building components

Answer

Reserves for replacement represent the annual set-aside needed to fund future replacement of capital items such as roofing, HVAC, and appliances when they wear out.

Question 5

Which type of property would MOST commonly rely on the income approach as the PRIMARY method of valuation for assessment purposes?

Accepted Answer

Stabilized apartment complex leased to multiple tenants

Answer

Income-producing properties like stabilized apartment complexes are primarily valued using the income approach because investors purchase them for the income stream they generate.

CAE - Certified Assessment Evaluator Practice Test

CAE - Certified Assessment Evaluator Practice Test

CAE Income Approach to Value 3