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Yield Capitalization — Theory and Basic Applications

Chapter 23. Yield Capitalization — Theory and Basic Applications. Modern computers allow appraisers to easily discount future cash flows to present value. In the past this process was difficult. Any investment can be considered the present worth of future benefits.

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Yield Capitalization — Theory and Basic Applications

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  1. Chapter 23 Yield Capitalization — Theory and Basic Applications

  2. Modern computers allow appraisers to easily discount future cash flows to present value. In the past this process was difficult. • Any investment can be considered the present worth of future benefits. • A dollar today will grow to $X over a period of time, and $X to be received in the future is worth a dollar today if discounted at the same rate. Chapter 23

  3. Discounting is the process in which future cash flows are converted into present value. • Discounting requires many calculations that are tedious for any human, but easy for many modern computers. • The sum of the present values of the future cash flows is the present value of the investment. This includes periodic cash flows and the reversion. Chapter 23

  4. The time value of money is represented in the “six functions of a dollar” tables. • These tables show how the value of a dollar can be impacted with compound interest. • They reflect the impact on the dollar from interest on interest. • There are six tables to follow. Each one shows a different impact of compound interest. Chapter 23

  5. What will $1 today grow to with compound interest? Chapter 23

  6. Table 23.2 Present Value of $1 • What is $1 in the future worth today? Chapter 23

  7. Table 23.3 Discounted Cash Flow—Level Annuity • What is $1 per period worth today ($100,000 per period and $1,000,000 at the end @10%)? Chapter 23

  8. Table 23.4 Investment Analysis of Drugstore Chapter 23

  9. Table 23.5 Straight-Line Change Chapter 23

  10. Table 23.6 Exponential-Curve Change Chapter 23

  11. Table 23.7 Level Income in Perpetuity Chapter 23

  12. Table 23.8 Analysis of Property with Level Income and Change in Value Chapter 23

  13. Table 23.9 Constant Change in Income and Value Chapter 23

  14. Table 23.10 Constant-Ratio Change in Income and Value Chapter 23

  15. Table 23.11 Constant-Ratio Change in Income and Value Chapter 23

  16. Problems • Suggested solutions begin on page 365. Chapter 23

  17. Problem 1D Chapter 23

  18. Problem 2B Chapter 23

  19. Problem 3B Chapter 23

  20. Problem 4B Chapter 23

  21. Problem 5B Chapter 23

  22. Problem 6C Chapter 23

  23. Problem 7A Chapter 23

  24. Problem 8B Chapter 23

  25. Problem 9C Chapter 23

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