BOMI Asset Management Practice Test

In discounted cash flow (DCF) analysis, a higher discount rate results in a lower property value. The discount rate reflects the risk and opportunity cost of investing in a particular asset. When the discount rate is increased, future cash flows generated by the property are given less weight in their present value calculations. This means that the further into the future the cash flows occur, the less valuable they become when discounted back to present value.

As a result, when a higher discount rate is applied, the present value of expected future cash flows decreases, leading to a lower overall valuation of the property. This dynamic highlights the impact of risk and time on investment valuations, emphasizing that investments perceived as riskier typically warrant a higher discount rate, which subsequently reduces their calculated value.