Which statement correctly contrasts direct capitalization and the discounted cash flow (DCF) approach for valuing a property?

• A. DCF uses projected cash flows with a discount rate but does not include an exit value.
• B. Direct capitalization uses stabilized NOI and a cap rate to estimate value; DCF uses projected cash flows with a discount rate to determine present value and exit value.
• C. Direct capitalization ignores NOI.
• D. DCF ignores the cap rate.

Answer: (B)

The difference being tested is how value is derived from income in two common property valuation methods. Direct capitalization uses a single, stable income figure—stabilized net operating income (NOI)—and a cap rate, so value is estimated as stabilized NOI divided by the cap rate. This method assumes the property's income is steady and perpetual, avoiding explicit year-by-year forecasts.

Discounted cash flow builds a forecast of cash flows for a holding period, estimating each year's expected cash flow and then discounting those amounts back to present value using a discount rate. At the end of the forecast, an exit value (the sale price) is also estimated and discounted back. This approach captures changes in income over time and the value of money today versus in the future.

So the correct statement aligns with: direct capitalization uses stabilized NOI and a cap rate to estimate value; DCF uses projected cash flows with a discount rate to determine present value and exit value.