The Process of Converting Periodic Income into a Value Estimate

question 18

Multiple Choice

The process of converting periodic income into a value estimate is referred to as income capitalization. Income capitalization models can generally be categorized as either direct capitalization models or discounted cash flow models. Which of the following statements best describes the direct capitalization method?

• A) Value estimates are based on a multiple of expected first year net operating income.
• B) Appraisers must make explicit forecasts of the property's net operating income for each year of the expected holding period.
• C) Appraisers must select the appropriate yield at which to discount future cash flows.
• D) The forecast must include the net income produced by a sale of the property at the end of the expected holding period.

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Definitions:

Fixed Costs

Expenses that do not change with the level of production or sales activities within a reasonable scale.

Depreciation Expense

The allocation of the cost of an asset over its useful life to gradually reduce its value on the balance sheet.

Operating Cash Flow

Cash generated from the normal operations of a business, reflecting the company's ability to generate sufficient revenue to maintain operations.

Fixed Costs

Costs that do not vary with the level of production or sales, such as rent, salaries, and insurance expenses.