The income capitalization approach is fundamentally based on the economic principle of anticipation, which posits that the value of an asset is the present worth of its expected future economic benefits or income stream. To convert these future benefits into a present value, a capitalization or discount rate is applied. This rate is derived from risk and expected return investment analysis, where investors demand a higher rate of return for investments with greater perceived risk. Therefore, both the expectation of future income (anticipation) and the quantification of its risk (risk and return) are the core economic principles underlying this valuation method.

C. Allowance of curable functional obsolescence is a concept used to calculate depreciation, which is a primary component of the Cost Approach, not the Income Approach.

D. Market value of building and improvements is a consideration within the Cost Approach or Market Approach, not a foundational principle of the Income Approach, which derives value from income.

1. Hitchner, J. R. (2017). Financial Valuation: Applications and Models (4th ed.). Wiley.

Chapter 3, "Income Approach," Section "Economic Principle of Anticipation": "The income approach is based on the economic principle of anticipation. In this approach, the value of the business is the present value of the economic income expected to be generated by the business." (Specific wording may vary, but the concept is central to the chapter's introduction).

Chapter 8, "Cost of Capital/Rates of Return": This chapter extensively details how discount and capitalization rates are built up based on components of risk and expected return, forming the basis for the income approach's conversion mechanism.

2. NACVA. (2023). Fundamentals, Techniques & Theory (FT&T) Course Materials. National Association of Certified Valuators and Analysts.

Module 1, "Overview of Valuation," Section "Valuation Principles": The principle of anticipation is defined and directly linked to the income approach as its theoretical basis.

Module 3, "Income Approach": The text explicitly states that the income approach converts future expected economic benefits into a present value. The development of the capitalization/discount rate is explained as a function of risk and the return required by a prudent investor.

3. Pratt, S. P., & Grabowski, R. J. (2010). Cost of Capital: Applications and Examples (4th ed.). Wiley.

Chapter 1, "Defining the Cost of Capital": The text establishes that the cost of capital (a key input for the income approach) is a measure of expected return required by investors to compensate them for the risk of the investment. This directly supports the principle of "risk and expected return investment analysis."