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Discounted Cash Flow or Capitalization For a current income flow, say rental, of C 0 per period being expected for n periods, the value, or more properly, the present value P 0 is: Current rental C 0 YP @ i for a period nYP factor Market Value P 0 where i is the capitalization rate

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This can be expressed as so that if n becomes too large or approaches infinity,

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Growth Explicit in Discounted Cash Flow If there is a constant growth element, g, in the cash flow, so that where C 2 = C 1 (1+g), C 3 = C 1 (1+g) 2, etc., the equation above can be reduced to (Gordon Growth Model)

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Therefore, r – g = i (1 + g) orr = I + ig + g or 1 + r = 1 + I + g (1 + i) = (1 + i)(1 + g) Capitalization Rate is growth implicit

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