In the context of the discount rate, what is the formula?

The concept of the discount rate is essential in financial analysis, particularly in the valuation and investment appraisal of properties. The correct formula for determining the discount rate is derived from the relationship between pre-tax cash flow and sales price. When you divide pre-tax cash flow by the sales price, you are essentially calculating the return on investment, which is represented by the discount rate.

This ratio reflects the annual income (before tax) generated by the property relative to its market value, thus providing a clear metric to assess whether the investment meets an investor's required return. It is a critical metric used by appraisers and real estate professionals to evaluate the profitability of investments and the health of the property market.

In contrast, the other formulas do not accurately reflect the discount rate. For instance, net operating income divided by building value gives a capitalization rate rather than a discount rate, while the sales price over pre-tax cash flow does not provide meaningful insight into investment returns, rather leading to an inverse calculation. Finally, multiplying building value by effective tax rate (ETR) relates to tax implications but does not contribute to the assessment of cash flow relative to price.

Understanding this relationship is vital for effective property valuation and investment decisions, helping practitioners in the field to determine appropriate pricing