What are discount rates and capitalization rates? Explain.
Sample Solution
Discount rates and capitalization rates are closely related methods of valuing a property or investment. Discount rates are the rate of return at which future cash flows from an asset are discounted to its present value, while capitalization rates are the rate used to convert anticipated net income into an estimated value for a real estate asset. In other words, discount rates represent the time value of money, while capitalization rates represent the risk associated with an investment. Capitalization and discounting can be used together in order to assess the relative risks and rewards involved when investing in a particular asset over different periods of time.