Key Takeaways
- Multi-rate discounting applies different discount rates to cash flows based on their individual risk levels, producing more accurate valuations.
- The APV method separates unlevered property value from financing benefits (interest tax shields), which is ideal when the capital structure changes over time.
- Certainty-equivalent valuation adjusts cash flows for risk directly (rather than the discount rate), making risk assumptions explicit and allowing them to vary over time.
- For properties transitioning from development to stabilization, advanced methods capture the declining risk profile more accurately than a single blended discount rate.
- In the APV example, financing benefits from interest deductibility added over $400,000 to investment value on a $3.5 million property.
This track contains subscriber-only lessons
Explore free tracks in this area of study, or subscribe for full access.
Browse available tracks"Monte Carlo, Sensitivity Analysis & Leverage Risk" is a Pro track
Upgrade to access all lessons in this track and the entire curriculum.
Test Your Knowledge
1.When is multi-rate discounting most appropriate?
2.What are the two components of the Adjusted Present Value (APV) method?
3.In the certainty-equivalent method, if a $500,000 expected cash flow has a certainty factor of 0.75, what is the certainty-equivalent cash flow?