**Study Questions from Chapter 8 and Chapter 14**.

- You have just completed the appraisal of an office building and have concluded that the market value of the property is $2,500,000. You expect Potential Gross Income (PGI) in the first year of operations to be $450,000; vacancy and collection losses to be 9 percent of PGI; operating expenses to be 38 percent of Effective Gross Income (EGI), and capital expenditures to be 4 percent of EGI.
**(Reference: Chapter 8 page 198-199)**

- An investment produces cash flows from operations as follows:

Year 1 2 3 4 5

NOI $150,000 $150,000 $150,000 $150,000 $150,000

Debt Service $125,000 $125,000 $125,000 $125,000 $125,000

Cash Flow at sale:

Sale Price: $2,000,000

Cost of sale: $125,000

Mortgage balance: $1,500,000

- Assuming the going-in capitalization rate is 8.00 percent, compute a value for the property using the
__direct capitalization____method (reference chap. 8 pages 199-208)__

- Assuming the required yield/return on
__unlevered cash__flows is 10 percent, and that the property will be held by a buyer for five years, compute the value of the property based on discounting unlevered cash flows__(means: does not take financing into account)____(reference using DCF analysis for valuation chapter 8 pages 199-208)__

- Assuming the relevant required yield/return on
**(takes financing into account)**is 15 percent, and that the property will be held by a buyer for five years, what is the present value of the levered cash flows?

- Assume an investment is priced at $5,000 and has the following income stream (year 1, $1,000; year 2, -$2,000; year 3, $3,000; and year 4, $3,000). Would an investor with a required rate of return of 15 percent be wise to invest at a price of $5,000?
__(Reference chapter 14 page 393-402).__ - Because the investment has a NPV of -$1,139.15
- Because the investment has a NPV of -$1,954.91
- Because the investment has a NPV of $1,069.66
- Because the investment has a NPV of $1,954.91 .

- You are considering the purchase of a small income-producing property for $150,000 that is expected to produce the following net cash flows:

__End of Year Cash Flow__

- $50,000
- $50,000
- $50,000
- $50,000

Assume your required internal rate of return on similar investments is 11 percent. What is the net present value of this investment opportunity? What is the going-in internal rate of return on this investment? Should you make the investment? Why or why not? __(Reference chapter 14 page 393-402).__