You Are Trying to Apply a Multi-Year DCF Analysis to Evaluate

question 8

Multiple Choice

You are trying to apply a multi-year DCF analysis to evaluate an investment property with some long-term leases in it. You observe that other properties with similar lease structure and risk have been selling at cap rates around 8% (based on NOI with no capital reserve) . You believe these other properties typically face capital expenditures on the order of 2% of property value per year in the long run, and that given such expenditures their net cash flows and values would reasonably be expected to grow in the long run at about 1% per year. What discount rate should you apply to your subject property in your DCF valuation?

• A) 6%
• B) 7%= (8% - 2%) + 1% = (caprate - CI/V) + g = y + g .
• C) 8%
• D) 9%
• E) 10%

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Definitions:

Supervision Expense

Supervision expense refers to the cost associated with overseeing and managing workers or operations within a business.

Depreciation Expense

The allocation of the cost of a tangible asset over its useful life.

Manufacturing Overhead-Applied

The allocation of manufacturing overhead costs to individual products or job orders based on a pre-determined overhead rate.

Direct Labor

The wages and other costs for labor directly involved in the production of goods or services.