What does direct capitalization ignore regarding cash flows?

Direct capitalization is a method used in real estate appraisal whereby a property's value is estimated based on its income-generating potential, typically by converting the net operating income (NOI) into an estimated value using a capitalization rate.

The correct choice relates to how direct capitalization treats future cash flows. Specifically, direct capitalization focuses on the first year’s cash flow, which is often represented by the current net operating income. It typically assumes that this first-year income will remain stable or constant over time without accounting for any growth or changes in income in subsequent years. This means that it does not incorporate the anticipated growth in cash flows over the entire investment horizon, which could result from factors such as property appreciation, rental increases, or changes in market conditions.

Therefore, the assertion that direct capitalization ignores subsequent years’ cash flows encapsulates the essential aspect of this valuation method, which simplifies the approach to valuing a property by relying predominantly on a singular year's income without adjusting for expected increases in income in future years. This is a critical distinction in understanding direct capitalization as it emphasizes the method's potential limitations when assessing properties with the expectation of significant cash flow growth over time.