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 capitalizationmethod (reference chap. 8 pages 199-208)
- Assuming the required yield/return on unlevered cash (means: does not take financing into account) 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 (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
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).