Consistent Treatment of Inflation in Discounted Cash Flow Valuation

Abstract

Since the mid-1960s inflation has been a consistent aspect of the U.S. economy. Even at the relatively low rates of approximately 2% that prevail today, inflation can have an important impact on property tax appraisal and must be treated consistently. In this paper, we derive the proper formulas for taking account of inflation in the context of the constant growth models often used when applying the income approach to valuation. We demonstrate how older approaches, still in widespread use in unitary tax appraisals today, fail to properly adjust for inflation.

Keywords: valuation inflation

JEL Classification: G32