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%

Question

Quizplus · Accepted Answer

The correct discount rate is 7%, calculated by adjusting the observed cap rate (8%) for the long-term capital expenditures (2%) and then adding the expected long-term growth rate (1%). This reflects the net yield (y) after accounting for capital expenditures, plus the expected growth (g) in net cash flows and property value.

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