Certified Pennsylvania Evaluator Practice Exam

Which principle describes the income approach to valuation?

1. Principle of Substitution

2. Principle of Anticipation

3. Principle of Contribution

4. Principle of Change

The correct answer is: Principle of Anticipation

The income approach to valuation is primarily based on the principle of anticipation. This principle posits that the value of an investment property is determined by the income it is expected to generate in the future. Investors and appraisers evaluate the potential income stream that a property can produce and discount that income back to present value using an appropriate rate of return. Through this lens, the anticipated future income reflects the property's inherent value since investors typically consider the potential financial returns when making purchasing decisions. The income approach is particularly applicable to income-producing properties such as commercial real estate, rental properties, and similar assets where future cash flows are a critical factor in determining overall value. Understanding how the principle of anticipation plays into the income approach allows evaluators to effectively assess and forecast property values based on expected performance over time.