Which appraisal method uses the present worth of future cash flows to estimate value?

The appraisal method that uses the present worth of future cash flows to estimate value is known as yield capitalization. This method is based on the principle that the value of an income-producing property is equal to the present value of the future cash flows it is expected to generate, typically measured over the holding period of the investment and made on the basis of the anticipated income.

Yield capitalization takes into account not just a single year of income but rather the total income stream over time, discounted back to its present value using an appropriate capitalization rate. This approach is particularly useful for properties with long-term income potential, such as commercial real estate, where investors are concerned with both the amount and timing of future cash flows.

In contrast, the other methods either do not focus on future cash flows or apply a different valuation approach. For instance, the gross income multiplier directly estimates value based on gross income without considering cash flow timing. The direct capitalization method provides a snapshot value based on a single year's income, making it less comprehensive than yield capitalization. Meanwhile, the cost approach estimates value based on the cost to replace or reproduce a property, which is entirely separate from future income potential.