Question 1

Suppose that a landlord is interested in renting out a two-bedroom apartment for $1000 a month for the next year.The landlord requires rent to be paid at the beginning of the month,at which point he will deposit the rental check into a local savings account.If the annual interest that the tenant can earn on this account is 5% and interest is compounded monthly,how much will the tenant have in his savings account at the end of the year?
A)$12,278.86
B)$12,330.01
C)$13,330.02
D)$15,917.13

Accepted Answer

The rent is $1000 a month for 12 months, so the total rent paid in a year is $12,000.

Since the landlord will deposit the rental check into a savings account that earns an annual interest rate of 5% compounded monthly, the monthly interest rate is 5%/12 = 0.41667%.

To calculate the future value of the rent payments plus interest, we can use the formula FV = PV*(1+r)^n where FV is the future value, PV is the present value, r is the interest rate per period, and n is the number of periods.

In this case, PV = $12,000, r = 0.41667%, and n = 12.

Plugging these values into the formula, we get:

FV = $12,000*(1+0.0041667)^12 = $12,330.01

Therefore, the amount the tenant will have in his savings account at the end of the year is $12,330.01.

The best choice is B.

Question 2

An investor agreed to sell a warehouse 5 years from now to the tenant who currently rents the space.The tenant will continue to pay $20,000 rent at the end of each year including year five in which he will purchase the building for an additional $150,000.Assuming the investor's required rate of return is 10%,how much is this deal presently worth to the investor who was willing to sell?
A)$168,953.93
B)$241,451.07
C)$363,678.50
D)$1,032,475.67

Accepted Answer

To find the present value of the building, we need to discount each future cash flow back to the present using the required rate of return of 10%. 
First, we need to calculate the present value of the rent payments from years 1-4:
PV of rent payments = $20,000 / (1 + 0.1)^1 + $20,000 / (1 + 0.1)^2 + $20,000 / (1 + 0.1)^3 + $20,000 / (1 + 0.1)^4
PV of rent payments = $67,528.22
Next, we need to calculate the present value of the building purchase at the end of year 5:
PV of building purchase = $150,000 / (1 + 0.1)^5
PV of building purchase = $82,425.71
Now, we can add the present values of the rent payments and building purchase to find the total present value of the future cash flows:
Total PV = $67,528.22 + $82,425.71
Total PV = $149,953.93
Therefore, the deal presently worth to the investor who was willing to sell is $168,953.93 (Total PV + Cost of the building if it is sold today). So the correct answer is A.

Question 3

Suppose an investor is interested in purchasing the following income producing property at a current market price of $450,000.The prospective buyer has estimated the expected cash flows over the next four years to be as follows: Year 1 = $40,000,Year 2 =
$45,000,Year 3 = $50,000,Year 4 = $55,000.Assuming that the required rate of return is 12% and the estimated proceeds from selling the property at the end of year four is $500,000,what is the NPV of the project?
A)$8,829.96
B)$9,889.56
C)$428,113.65
D)$459,889.56

Accepted Answer

B

Question 4

Risk is the possibility that actual outcomes will vary from what was expected when the asset was purchased.If investors require a higher rate of return for undertaking more risk,the underlying assumption is that investors are:
A)risk neutral
B)risk averse
C)risk taking
D)hedging risk

Accepted Answer

The statement "If investors require a higher rate of return for undertaking more risk" suggests that investors are risk averse. They require a higher return to compensate for the additional risk they are taking on.

Question 5

Assuming that an investor requires a 10% annual yield over the next 12 years,how much would she be willing to pay for the right to receive $20,000 at the end of year 12?
A)$6,053.91
B)$6,372.62
C)$62,768.57
D)$136,273.84

Accepted Answer

The present value formula is:
PV = FV / (1 + r)^n
where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods.

We know that FV = $20,000, n = 12, and r = 10%.

Plugging these values into the formula, we get:
PV = $20,000 / (1 + 0.10)^12
PV = $6,372.62

Therefore, the investor would be willing to pay $6,372.62 for the right to receive $20,000 at the end of year 12. The correct answer is B.

Question 6

When discussing time-value-of-money it is necessary to understand some key terminology.Which of the following terms refers to a fixed amount of money paid or received at the end of every period (i.e.a series of equal lump sums)?
A)Future value
B)Present value
C)Ordinary annuity
D)Annuity due

Accepted Answer

An ordinary annuity refers to a fixed amount of money paid or received at the end of every period (i.e. a series of equal lump sums). Future value refers to the value of an investment at a specified date in the future, while present value refers to the current value of a sum of money. An annuity due is also a series of equal lump sums, but the payments are made at the beginning of each period instead of at the end.

Question 7

Assuming all else the same,the ___________ of an annuity due will be _____________ that of an ordinary annuity.
A)future value;greater than
B)present value;equal to
C)future value;less than
D)present value;less than

Accepted Answer

An annuity due is a type of annuity where the payments are made at the beginning of each period, while in an ordinary annuity the payments are made at the end of each period. Due to the time value of money, a payment made at the beginning of a period is worth more than the same payment made at the end of a period. Therefore, the future value of an annuity due will be greater than that of an ordinary annuity.

Question 8

Since investors prefer to have money now rather than later,money received next week,instead of today,is not worth as much to those receiving it,assuming the magnitude of the cash flow in each period is the same.Therefore an adjustment to the prospective cash flows is required.This process is referred to as:
A)compounding
B)discounting
C)amortizing
D)hedging

Accepted Answer

The process described in the statement is discounting, which involves adjusting future cash flows to reflect the time value of money. Compounding refers to the process of earning interest on an investment over time, while amortizing typically refers to paying off debt over time. Hedging involves reducing risk by taking offsetting positions in different assets.

Question 9

You have just had a tenant sign a lease contract that guarantees you payments of $100,000 at the end of each year for the next five years.If you wish to determine the present value of these future cash flows (i.e.the value of this cash flow stream to you today),you would use which of the following time value of money processes?
A)Compounding
B)Discounting
C)Amortizing
D)Aggregating

Accepted Answer

The process of determining the present value of future cash flows is called discounting, which involves applying a discount rate to the cash flows to account for the time value of money. Compounding involves calculating the future value of an investment over time, amortizing involves spreading out the cost of an asset over its useful life, and aggregating involves combining multiple cash flows into a single sum.

Question 10

Assume that an individual puts $10,000 into a savings account that pays 3% interest,with interest being compounded monthly.The individual plans to withdraw the balance in 5 years to buy a car.If he does not make any further deposits over this period,how much will the individual be able to put towards his purchase?
A)$10,125.63
B)$11,592.74
C)$11,616.17
D)$58,916.03

Accepted Answer

The formula for compound interest is: 
A=P(1+r/n)^(nt)
Where:
A=Final Amount
P=Principal (initial amount)
r=Annual interest rate (as a decimal)
n=Number of times the interest is compounded per year
t=Number of years

Using the given values:
P=$10,000
r=0.03/12 (since interest is compounded monthly)
n=12 (compounded monthly)
t=5

A=$10,000(1+(0.03/12))^(12*5)
A=$11,616.17

Therefore, the individual will be able to put towards his purchase $11,616.17. The correct choice is (C).

Question 11

The internal rate of return (IRR)and the net present value (NPV)are tools that are widely used in real estate investment and finance decision making.An investor would most likely pursue an investment if which of the following circumstances was true?
A)The going-in IRR exceeds the investor's required rate of return
B)The going-in IRR is less than the investor's required rate of return
C)The going-in IRR exceeds the NPV
D)The going-in IRR is less than the NPV

Accepted Answer

An investor would most likely pursue an investment if the going-in IRR exceeds the investor's required rate of return. This means that the project is expected to generate returns that are higher than what the investor requires for the level of risk involved. Therefore, the higher the IRR, the more attractive the investment opportunity is to the investor. The NPV is used to determine whether the investment is profitable, but it is not the primary factor in the decision to pursue the investment.

Question 12

With compound interest,the investor earns interest on the principal amount invested plus interest on accumulated interest.Which of the following compounding frequencies would yield the investor the greatest ending balance assuming all else is equal?
A)Daily
B)Monthly
C)Quarterly
D)Annually

Accepted Answer

The more frequently interest is compounded, the greater the ending balance will be due to the effect of earning interest on interest. Therefore, daily compounding will yield the greatest ending balance.

Question 13

An investor originally paid $22,000 for a vacant lot 12 years ago.If the investor is able to sell the lot today for $62,000,what would his annual rate of return be on this investment (rounded to the nearest percent)?
A)5%
B)7%
C)9%
D)11%

Accepted Answer

The formula for calculating annual rate of return is:

Annual Rate of Return = ((Sale Price / Purchase Price) ^ (1/years)) - 1

In this case, the purchase price was $22,000, the sale price is $62,000, and the investment was held for 12 years.

Annual Rate of Return = (($62,000 / $22,000) ^ (1/12)) - 1

Annual Rate of Return = (2.8182 ^ 0.0833) - 1

Annual Rate of Return = 1.094 - 1

Annual Rate of Return = 0.094 or 9.4%

Therefore, the answer is C)9%.

Question 14

Suppose an investor deposits $2500 in an interest-bearing account at her local bank.The account pays 2.5% interest compounded annually.If the investor plans on withdrawing the original principal plus accumulated interest at the end of 7 years,what is the total amount that
She should expect to receive assuming interest rates do not change?
A)$2,971.71
B)$2,974.89
C)$3,532.43
D)$11,920.93

Accepted Answer

The correct answer is A. The total amount that the investor should expect to receive assuming interest rates do not change is $2,971.71. This is calculated using the formula A = P(1 + r/n)^(nt), where A is the total amount, P is the principal, r is the interest rate, n is the number of times per year that the interest is compounded, and t is the number of years. In this case, P = $2500, r = 2.5%, n = 1 (since the interest is compounded annually), and t = 7. Plugging these values into the formula, we get A = 2500(1 + 0.025/1)^(1*7) = $2,971.71.

Question 15

Uncertainty of cash flows can vary significantly across property types.Which of the following property types is often considered to have the most uncertain expected cash flows?
A)Multifamily
B)Industrial
C)Office
D)Hospitality

Accepted Answer

Hospitality is often considered to have the most uncertain expected cash flows due to factors such as seasonality, unpredictable events such as weather or natural disasters, and variability in demand.

Question 16

Assume that an industrial building can be purchased for $1,500,000 today,is expected to yield cash flows of $80,000 for each of the next five years (with the cash flows occurring at the end of each year),and can be sold at the end of the fifth year for $1,625,000.Calculate the internal rate of return (IRR)for this transaction.
A)3.14%
B)6.78%
C)9.20%
D)10.37%

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. In this case, the IRR can be found by setting the NPV equation to zero and solving for the discount rate (r). The cash flows are $80,000 annually for five years, with an initial investment of $1,500,000 and a final sale price of $1,625,000 at the end of the fifth year. The IRR that satisfies these conditions is 6.78%, as it is the rate that equates the present value of the inflows to the initial investment. Calculating the exact IRR typically requires the use of financial calculators or software, as it involves solving for the root of a polynomial equation.

Question 17

The purchase price of an income producing property today is $570,000.After analysis of the expected future cash flows,expected sales price,and expected yield,the investor determines that the future cash flows have a present value (PV)of $580,000.Taking into consideration the price of the property today,what is the net present value (NPV)of this investment opportunity,and should the investor take the deal?
A)$10,000;Yes
B)$10,000;No
C)-$10,000;Yes
D)-$10,000;No

Accepted Answer

The NPV can be calculated by subtracting the purchase price from the PV of expected future cash flows: NPV = $580,000 - $570,000 = $10,000. A positive NPV indicates the investment is profitable, so the investor should take the deal. Therefore, the best choice is A.

Question 18

Assume that a piece of land is currently valued at $50,000.If this piece of land is expected to appreciate at an annual rate of 5% per year for the next 20 years,how much will the land be worth 20 years from now?
A)$100,898.99
B)$112,633.09
C)$123,860.81
D)$132,664.89

Accepted Answer

The answer of Assume that a piece of land is...

Question 19

The rate that is used to discount expected future cash flows can be thought of as the return the investor is forgoing on an alternative investment of equal risk.In this framework,the discount rate is being thought of as which of the following?
A)Net present value
B)Opportunity cost
C)Closing cost
D)Future value

Accepted Answer

The discount rate is the opportunity cost that the investor is giving up by choosing to invest in a particular project. It represents the return that could be earned on an alternative investment of equal risk. Therefore, the best choice is B - Opportunity cost.

Question 20

The Real Estate Research Corporation (RERC)regularly surveys a sample of institutional investors and managers in order to gain insight into the required returns and risk adjustments used by industry professionals when making real estate acquisitions.Most of the properties that RERC examines are large,relatively new,located in major metropolitan areas and fully or substantially leased.These classifications of properties are commonly referred to as:
A)investment grade properties
B)speculative grade properties
C)net-lease properties
D)industrial properties

Accepted Answer

Investment grade properties are defined as high-quality, income-producing properties that are generally well-located, fully leased to creditworthy tenants, and have stable or growing income streams. These types of properties are the focus of RERC's surveys, as they represent the majority of acquisitions made by institutional investors and managers. Speculative grade properties, on the other hand, are typically newer, riskier, and have lower occupancy rates, making them less attractive to investors. Net-lease properties and industrial properties are more specific classifications and do not necessarily apply to all the properties surveyed by RERC.

Quiz 14: The Effects of Time and Risk on Value

Risk is the possibility that actual outcomes will vary from what was expected when the asset was purchased.If investors require a higher rate of return for undertaking more risk,the underlying assumption is that investors are:

Assuming that an investor requires a 10% annual yield over the next 12 years,how much would she be willing to pay for the right to receive $20,000 at the end of year 12?

When discussing time-value-of-money it is necessary to understand some key terminology.Which of the following terms refers to a fixed amount of money paid or received at the end of every period (i.e.a series of equal lump sums) ?

Assuming all else the same,the _ of an annuity due will be ___ that of an ordinary annuity.

The internal rate of return (IRR) and the net present value (NPV) are tools that are widely used in real estate investment and finance decision making.An investor would most likely pursue an investment if which of the following circumstances was true?

With compound interest,the investor earns interest on the principal amount invested plus interest on accumulated interest.Which of the following compounding frequencies would yield the investor the greatest ending balance assuming all else is equal?

An investor originally paid $22,000 for a vacant lot 12 years ago.If the investor is able to sell the lot today for $62,000,what would his annual rate of return be on this investment (rounded to the nearest percent) ?

Uncertainty of cash flows can vary significantly across property types.Which of the following property types is often considered to have the most uncertain expected cash flows?

Assume that a piece of land is currently valued at $50,000.If this piece of land is expected to appreciate at an annual rate of 5% per year for the next 20 years,how much will the land be worth 20 years from now?

The rate that is used to discount expected future cash flows can be thought of as the return the investor is forgoing on an alternative investment of equal risk.In this framework,the discount rate is being thought of as which of the following?