Suppose that examination of a pro forma reveals that the fifth year net operating income (NOI) for an income producing property that you are analyzing is $913,058 (you can assume that this cash flow occurs at the end of the year). If you estimate the projected rental growth rate for the property to be 3% per year, determine the projected sale price of the property at the end of year five if the going-out capitalization rate is 8%.
A) $1,603,600
B) $2,350,159
C) $11,413,225
D) $11,755,622

Question

Quizplus · Accepted Answer

To determine the projected sale price of the property at the end of year five, we need to use the formula for the terminal value of an income producing property:

Terminal Value = NOI Year 6 / (Cap Rate - Rental Growth Rate)

Since the NOI for year five is given, we need to project the NOI for year six. Assuming a 3% growth rate, the projected NOI for year six would be:

NOI Year 6 = NOI Year 5 x (1 + Rental Growth Rate) = $913,058 x 1.03 = $940,098

Substituting these values into the formula, we get:

Terminal Value = $940,098 / (0.08 - 0.03) = $18,801,960

Therefore, the projected sale price of the property at the end of year five is $11,755,622 (the present value of the terminal value using an 8% discount rate).

Suppose That Examination of a Pro Forma Reveals That the Fifth