Discount Rate

The rate at which future cash flows are discounted. We discount the value of money that is expected to be earned further out in the future because it is less certain that we will receive it. So a dollar earned is worth less and less the further out in the future we expect to earn it. The decrease in value is determined by the discount rate we apply over the hold period. The discounted values in each period are then added together to create a present value of an asset in a discounted cash flow (DCF) model. In real estate valuation models, the discount rate can be interpreted as the Cap Rate plus expected NOI growth, representing the income and growth components of the total required rate of return, respectively.

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