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.

Question

Maximilian Bennett

Social Studies

13 March, 09:02

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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Answers (1)

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Yusuf Dodson · Answer 1

A). Value estimates are based on a multiple of expected first year net operating income.

Explanation:

The direct capitalization method is elucidated as the method that is employed to convert the income in terms of value by dividing the annual operating income (net) initiated through the property by the cap. (capitalization) rate.

As per the question, option A i. e. 'Value estimates are based on a multiple of expected first-year net operating income' is the statement that most appropriately outlines the direct capitalization as it correctly describes the process of 'converting periodic income into a value estimate.' Thus, option A is the correct answer.