A property generates annual NOI of $75,000. Using a capitalization rate of 8.5%, what is the indicated value by direct capitalization?
Correct Answer
C) $882,353
Value = $75,000 / 0.085 = $882,352.94, rounded to $882,353. The $750,000 choice would use a 10% rate. Multiplying NOI by 0.085 gives exactly $6,375, which is the wrong operation for capitalization. It does not give $637,500, and no extra decimal-placement error is needed to obtain the $6,375 distractor.
Why This Is the Correct Answer
Value = $75,000 / 0.085 = $882,352.94, rounded to $882,353. The $750,000 choice would use a 10% rate. Multiplying NOI by 0.085 gives exactly $6,375, which is the wrong operation for capitalization. It does not give $637,500, and no extra decimal-placement error is needed to obtain the $6,375 distractor.
More Income Approach Questions
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