Which of the following rates should be used when performing a discounted cash flow analysis for determining the market value of a commercial real estate asset?

When performing a discounted cash flow (DCF) analysis to determine the market value of a commercial real estate asset, the appropriate rate to use is the market discount rate. This rate reflects the expected return that investors require for taking on the risk associated with the specific asset and its cash flows over time. The market discount rate incorporates the risks of the property type, market conditions, and the specific investment characteristics, making it a crucial input for accurately assessing the present value of future cash flows.

In contrast, the opportunity cost of capital rate typically represents the return that could be earned on an alternative investment with similar risk, but it does not necessarily account specifically for the nuances and risk factors of the particular real estate asset being evaluated. The effective annual interest rate pertains more to borrowing costs rather than the expected return on investment, and while it is important in financial assessments, it is not directly applicable in determining the market value of an asset through a DCF analysis.

The capitalization rate is used to evaluate the income-generating potential of a property and is often applied in direct capitalization methods rather than in the DCF approach. It reflects the relationship between income and value but does not provide the same detailed assessment of cash flows as the market discount rate does during a DCF analysis