Question 1

Given the following information,calculate the going-out cap rate.Estimated holding period: 5 years,NOI for year 1: $120,000,NOI for year 5: $150,000,NOI for year 6: $155,250,Expected sale price at end of year 5: $1,350,000.

Accepted Answer

To calculate the going-out cap rate, we need to use the formula:

Going-out cap rate = (Net Operating Income (NOI) in year 5 / Expected sale price at end of year 5) + estimated annual NOI growth rate

The estimated annual NOI growth rate can be calculated as:

Estimated annual NOI growth rate = ((NOI in year 6 / NOI in year 5) - 1)

Plugging in the given values:

Estimated annual NOI growth rate = ((155,250 / 150,000) - 1) = 3.5%

Going-out cap rate = (150,000 / 1,350,000) + 3.5% = 0.1115 or 11.15%

Therefore, the best choice is C.

Question 2

The use of financial leverage in purchasing an income-producing property can affect the amount of cash required at acquisition,the net cash flows from rental operations,the net cash flows from the eventual sale of the property,and the ultimate return on invested equity.Assuming the going-in IRR is greater than the effective borrowing cost,if an investor increases his leverage rate,say from 75% to 80%,we would expect which of the following to occur?

Accepted Answer

A

Question 3

Given the following information,calculate the estimated terminal value of the property at the end of its holding period.Going-out cap rate: 9%,Estimated holding period: 5 years,NOI for year 5: $100,500,NOI for year 6: $102,000.

Accepted Answer

The estimated terminal value can be calculated using the following formula: 
Terminal Value = NOI for Year 6 ÷ Going-out Cap Rate 
Terminal Value = $102,000 ÷ 0.09 
Terminal Value = $1,133,333

Question 4

Changes in the discount rate used to complete net present value analysis can have a significant impact on the estimated value of the investment and therefore affect the overall investment decision.As the required internal rate of return (IRR)increases,the net present value will:

Accepted Answer

As the required internal rate of return (IRR) increases, the discount rate used in net present value analysis increases as well, which means the discount factor for future cash flows decreases. As a result, the net present value will decline because the present value of future cash flows is lower.

Question 5

Net present value (NPV)is interpreted using the following decision rule: The investor will purchase the property as long as the NPV is:

Accepted Answer

A positive NPV indicates that the present value of cash inflows generated by the property is greater than the initial investment, which means that the investment is expected to generate a profit. Therefore, the investor should purchase the property if the NPV is greater than zero. A zero NPV indicates that the investment is expected to generate exactly enough cash flows to cover the initial investment, but not to generate a profit. Thus, the investor may decide to purchase or not purchase the property based on other factors. A negative NPV indicates that the present value of cash inflows generated by the property is less than the initial investment, which means that the investment is expected to generate a loss. Therefore, the investor should not purchase the property if the NPV is less than zero. The opportunity cost of investment is the return that could be earned on an alternative investment of similar risk. It is not directly related to the NPV decision rule.

Question 6

While net present value (NPV)and internal rate of return (IRR)analysis both may be used as investment decision criteria,there are some limitations to the IRR method that make its use as an investment criterion problematic in certain situations.All of the following are limitations of the IRR method EXCEPT:

Accepted Answer

All of the limitations listed are actually limitations of the IRR method, except for choice C. The IRR methodology can be used to make comparisons across different investment opportunities, but it may not be the most effective way to do so. NPV may be a better tool for comparing investments with different initial costs or cash flow patterns.

Question 7

It is common for investors in real estate to use mortgage debt to help finance capital investment.The use of debt can have a profound impact on the expected cash flows for a
Particular property.Which of the following terms refers to cash flows that represent the property's income after subtracting any payments due to the lender?

Accepted Answer

Levered cash flows refer to cash flows that take into account the impact of using mortgage debt on the property's income. They represent the property's income after subtracting any payments due to the lender. Unlevered cash flows, on the other hand, do not take into account any debt financing and represent the property's income before any debt payments. Discounted cash flows and compounded cash flows refer to methods of valuing investments and are not directly related to the impact of debt on a property's cash flows.

Question 8

Given the following information,calculate the NPV for this property.Initial cash outflow: $200,000,Discount rate: 15%,CF for year 1: $25,876,CF for year 2: $23,998,CF for year 3: $23,013,CF for year 4: $22,105,CF for year 5: $144,670.

Accepted Answer

To calculate the NPV, we need to discount each cash flow to present value and then subtract the initial cash outflow. Using a financial calculator or spreadsheet, we get:

NPV = -$200,000 + $25,876/(1.15)^1 + $23,998/(1.15)^2 + $23,013/(1.15)^3 + $22,105/(1.15)^4 + $144,670/(1.15)^5
NPV = -$59,657.40

Therefore, the correct answer is B) -$59,657.

Question 9

To overcome the potential shortcomings of single-year decision making metrics,many investors in real estate also perform multiyear discounted cash flow (DCF)valuation.DCF valuation differs from the single-year ratio analysis in all of the following ways EXCEPT:

Accepted Answer

DCF and single-year ratio analysis both require defensible cash flow estimates that incorporate appropriate measures of income and expenses.

Question 10

Just as it is important for an investor to consider the impact of financial leverage on her return,it is also necessary to account for the effect of income taxes.How would the presence of income taxes impact the levered going-in IRR?

Accepted Answer

Income taxes would reduce the levered going-in IRR. This is because income taxes would decrease the cash flows available for distribution to investors, which would lower the IRR. Additionally, the impact of income taxes would be greater for higher levered investments, further reducing the levered going-in IRR.

Question 11

In discounted cash flow (DCF)analysis,the sale price of the property must be estimated at the end of the expected holding period.The most common method for determining the terminal value of the property is the:

Accepted Answer

The answer of In discounted cash flow (DCF)analysis,the sale price...

Question 12

An important piece of criteria for investors to consider when deciding between real estate investment opportunities and investing in stocks or bonds is the effect of income taxes on their return.For most investors,the effective tax rate on commercial real estate is:

Accepted Answer

The effective tax rate on commercial real estate is typically lower than the tax rate on stocks or bonds due to the ability to take advantage of depreciation deductions, mortgage interest deductions, and other tax benefits specific to owning real estate. However, it is important to note that each individual's tax situation may vary, and it is important to consult with a tax professional before making any investment decisions.

Question 13

Suppose you purchased an income producing property for $95,000 five years ago.In Year 1,you were able to negotiate a lease that paid $10,000 per year at the end of each year.If you are able to sell the property at the end of year 5 for $100,000 (after receiving our final lease payment),what was the internal rate of return (IRR)on this investment?

Accepted Answer

The answer of Suppose you purchased an income producing property...

Question 14

Given the following information,calculate the appropriate after-tax discount rate.Tax rate on comparable risk investment: 35%,Investor's before-tax opportunity cost: 12%,Capitalization rate: 8%.

Accepted Answer

The answer of Given the following information,calculate the appropriate after-tax...

Question 15

In discounted cash flow analysis,the industry standard for pro forma cash flow projections of investment properties is typically:

Accepted Answer

The answer of In discounted cash flow analysis,the industry standard...

Question 16

While the general concepts of investment value and market value are very similar,there is an important distinction between the two.All of the following statements regarding investment value are true EXCEPT:

Accepted Answer

Investment value is specific to an individual investor's circumstances and expectations, not based on the expectations of a typical or average investor. Market value, on the other hand, considers the perspective of a typical investor.

Question 17

The use of financial leverage when investing in real estate is a double-edged sword.While increased leverage may allow the investor to "purchase" higher expected returns,the "price" of doing so is an increase in which of the following risks?

Accepted Answer

Financial leverage increases the risk of default, as the investor has to make loan payments regardless of whether the property is generating income or not. The other options are not directly related to the use of leverage in real estate investing.

Question 18

The internal rate of return (IRR)on a proposed investment is the discount rate that makes the net present value of the investment:

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. This means it is the rate at which the investment breaks even considering the time value of money.

Question 19

Many investors use mortgage debt to help finance capital investment for income-producing real estate.In doing so,the owner will receive income as long as the property produces enough income to cover all operating and capital expenditures,the mortgage payment,and all state and federal income taxes.Therefore,the owner's claim is commonly
Referred to as a:

Accepted Answer

The type of claim described in the scenario is a residual claim. This is because the owner's claim to the income is paid after all operating and capital expenses, mortgage payments, and taxes have been covered. They only receive the remaining income, which is referred to as the residual. This is unlike a primary claim, which would be paid first and would have priority over other claims. A joint claim would involve multiple parties sharing a claim to the income, and a superior claim would have priority over other claims due to its legal status.

Question 20

Given the following information,calculate the before-tax equity reversion (BTER).NOI: $89,100,Annual Debt Service: $58,444,Net Sale Proceeds: $974,700,Remaining Mortgage Balance: $631,026.

Accepted Answer

Before-Tax Equity Reversion (BTER) is calculated as the Net Sale Proceeds minus the Remaining Mortgage Balance. So, BTER = $974,700 - $631,026 = $343,674.

Quiz 19: Investment Decisions: NPV and IRR

Given the following information,calculate the going-out cap rate.Estimated holding period: 5 years,NOI for year 1: $120,000,NOI for year 5: $150,000,NOI for year 6: $155,250,Expected sale price at end of year 5: $1,350,000.

Given the following information,calculate the estimated terminal value of the property at the end of its holding period.Going-out cap rate: 9%,Estimated holding period: 5 years,NOI for year 5: $100,500,NOI for year 6: $102,000.

Changes in the discount rate used to complete net present value analysis can have a significant impact on the estimated value of the investment and therefore affect the overall investment decision.As the required internal rate of return (IRR) increases,the net present value will:

Net present value (NPV) is interpreted using the following decision rule: The investor will purchase the property as long as the NPV is:

Given the following information,calculate the NPV for this property.Initial cash outflow: $200,000,Discount rate: 15%,CF for year 1: $25,876,CF for year 2: $23,998,CF for year 3: $23,013,CF for year 4: $22,105,CF for year 5: $144,670.

To overcome the potential shortcomings of single-year decision making metrics,many investors in real estate also perform multiyear discounted cash flow (DCF) valuation.DCF valuation differs from the single-year ratio analysis in all of the following ways EXCEPT:

Just as it is important for an investor to consider the impact of financial leverage on her return,it is also necessary to account for the effect of income taxes.How would the presence of income taxes impact the levered going-in IRR?

In discounted cash flow (DCF) analysis,the sale price of the property must be estimated at the end of the expected holding period.The most common method for determining the terminal value of the property is the:

An important piece of criteria for investors to consider when deciding between real estate investment opportunities and investing in stocks or bonds is the effect of income taxes on their return.For most investors,the effective tax rate on commercial real estate is:

Given the following information,calculate the appropriate after-tax discount rate.Tax rate on comparable risk investment: 35%,Investor's before-tax opportunity cost: 12%,Capitalization rate: 8%.

In discounted cash flow analysis,the industry standard for pro forma cash flow projections of investment properties is typically:

While the general concepts of investment value and market value are very similar,there is an important distinction between the two.All of the following statements regarding investment value are true EXCEPT:

The use of financial leverage when investing in real estate is a double-edged sword.While increased leverage may allow the investor to "purchase" higher expected returns,the "price" of doing so is an increase in which of the following risks?

The internal rate of return (IRR) on a proposed investment is the discount rate that makes the net present value of the investment:

Given the following information,calculate the before-tax equity reversion (BTER) .NOI: $89,100,Annual Debt Service: $58,444,Net Sale Proceeds: $974,700,Remaining Mortgage Balance: $631,026.