Question 1

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, which is a series of equal lump sums. Future value is the value of an investment at a specific date in the future. Present value is the current value of a future cash flow or series of cash flows. An annuity due refers to a fixed amount of money paid or received at the beginning of every period, rather than at the end like an ordinary annuity.

Question 2

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 NPV is negative.
D)The NPV is equal to zero.

Accepted Answer

An investor would pursue an investment if the going-in IRR exceeds the investor's required rate of return. This is because IRR represents the rate of return that an investment is expected to generate and if it exceeds the required rate of return, the investment is considered attractive. On the other hand, if the going-in IRR is less than the investor's required rate of return or the NPV is negative, the investment is not considered attractive and the investor may not pursue it. A NPV of zero indicates that the investment is expected to generate exactly the required rate of return and may or may not be pursued depending on other factors.

Question 3

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 typically refer to high-quality, stabilized properties with strong occupancy and cash flow, located in prime markets. These properties are considered to be lower risk investments and attract institutional investors who typically seek stable, long-term returns.

Question 4

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,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)7.07%
C)9.20%
D)10.37%

Accepted Answer

The IRR is the discount rate that makes the net present value (NPV) of all cash flows equal to zero. By calculating the IRR for the given cash flows ($80,000 annually for 5 years and $1,625,000 at the end of year 5), the IRR is found to be approximately 7.07%.

Question 5

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 properties, such as hotels and resorts, often have the most uncertain expected cash flows due to the dependency on levels of tourism, economic conditions, and seasonal fluctuations.

Question 6

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 in this context is being thought of as the opportunity cost - the return the investor is giving up by choosing to invest in a particular project instead of an alternative investment of equal risk.

Question 7

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

If investors require a higher rate of return for undertaking more risk, it means they are risk-averse. This is because they are seeking compensation for taking on additional risk, indicating that they prefer safer investments and are not willing to take on additional risk without a commensurate reward. Risk-neutral investors would not require a higher rate of return for taking on additional risk, and risk-taking investors would actively seek out riskier investments. Hedging risk is a strategy to mitigate risk, rather than a characteristic of investors.

Question 8

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 interested 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 because the total amount that the investor should expect to receive is $2,971.71. This is calculated by multiplying the original principal by the future value factor, which is (1 + r)^n, where r is the annual interest rate and n is the number of years. In this case, the future value factor is (1 + 0.025)^7 = 1.1886, so the total amount that the investor should expect to receive is $2500 * 1.1886 = $2,971.71.

Question 9

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?
A)5%
B)7%
C)9%
D)11%

Accepted Answer

To calculate the annual rate of return, we need to use the formula:

Annual rate of return = (final value / original value)^(1/years) - 1

Plugging in the given values:

Annual rate of return = ($62,000 / $22,000)^(1/12) - 1
Annual rate of return = 1.4422^(1/12) - 1
Annual rate of return = 0.0869 or 8.69%

Therefore, the closest answer choice is C) 9%.

Question 10

Assume an investor with $5000 to invest is considering several alternatives,each covering ten years.Which of the following alternatives would you expect the investor to choose accounting for the time-value-of-money in your calculations? A)Investor receives $500 at the end of year 1,plus the original $5000 at the end of year 10. B)Investor receives $50 at the end of each year for 10 years,plus the original $5000 at the end of 10 years. C)Investor receives $500 at the end of the 10^th year,plus the original $5000. D)Investor receives $5000 at the end of year 10.

Accepted Answer

The answer of Assume an investor with $5000 to invest...

Question 11

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 beginning 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 determine the present value of this investment, we need to calculate the present value of the annual rent payments for the next five years and the present value of the purchase price in year five. Using a financial calculator, we can determine that the present value of the rent payments is $84,209.46, and the present value of the purchase price is $84,744.47. Adding these values together, we get a total present value of $168,953.93.

Question 12

Assuming all else the same,the future value of an annuity due will be _____________ that of an ordinary annuity.
A)Greater than
B)Equal to
C)Less than
D)Incomparable to

Accepted Answer

An annuity due has payments that occur at the beginning of each period, while an ordinary annuity has payments that occur at the end of each period. Because the payments of an annuity due have more time to compound before the end of the annuity, the future value will be greater than that of an ordinary annuity.

Question 13

Assume that an individual puts $10,000 into a savings account that pays 3% interest compounded monthly with the intent 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

We can use the formula A=P(1+r/n)^(nt) where A is the final amount, P is the initial amount, r is the interest rate, n is the number of times the interest is compounded per year, and t is the time period in years.

Plugging in the given values, we get:

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

Therefore, the individual will be able to put $11,616.17 towards the car purchase. Option C is the correct answer.

Question 14

Suppose that a tenant is interested in renting out a two-bedroom apartment for $1000 a month for the next year.While the tenant requires rent to be paid at the beginning of the month,he will not be depositing the rental check into a local savings account until the end of each month.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)$12,613.94
C)$13,330.02
D)$15,917.13

Accepted Answer

The correct answer is A.The tenant will have $12,278.86 in his savings account at the end of the year. This is because he will be earning interest on the rent money that he deposits into the account each month. The interest will be compounded monthly, which means that it will be added to the account balance each month and will then earn interest in the following month. The total amount of interest that the tenant will earn over the year is $278.86.

Question 15

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

The answer of Suppose an investor is interested in purchasing...

Question 16

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.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 question is discounting, which is the process of adjusting future cash flows to their present value using a discount rate that accounts for the time value of money. This is because money received in the future is worth less than money received today due to factors such as inflation and opportunity cost. Compounding involves calculating the future value of an investment, amortizing involves spreading out the cost of an asset over time, and hedging involves strategies to manage the risk of an investment.

Question 17

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 higher the ending balance will be. Therefore, daily compounding will yield the greatest ending balance.

Question 18

Assume that a piece of land is currently value 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

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

We can use the formula for present value of a single sum: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the annual interest rate, and n is the number of years. Plugging in the values, 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, given the requirement of a 10% annual yield.

Question 20

The purchase price of a piece of property is $70,000.After analysis of the cash flows,expected sales price,and expected yield,the investor decides the deal has a present value (PV)of $80,000.What is the net present value (NPV),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 is calculated as the present value (PV) minus the purchase price. Here, NPV = $80,000 - $70,000 = $10,000. Since the NPV is positive, the investor should take the deal.

Quiz 14: The Effects of Time and Risk on Value

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) ?

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?

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,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.

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?

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?

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:

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?

Assume an investor with $5000 to invest is considering several alternatives,each covering ten years.Which of the following alternatives would you expect the investor to choose accounting for the time-value-of-money in your calculations?

Assuming all else the same,the future value of an annuity due will be _____________ that of an ordinary annuity.

Assume that an individual puts $10,000 into a savings account that pays 3% interest compounded monthly with the intent 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?

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.Therefore an adjustment to the prospective cash flows is required.This process is referred to as:

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?

Assume that a piece of land is currently value 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?

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?

The purchase price of a piece of property is $70,000.After analysis of the cash flows,expected sales price,and expected yield,the investor decides the deal has a present value (PV) of $80,000.What is the net present value (NPV) ,and should the investor take the deal?