A property's NOI is $88,000 and comparable sales indicate rates of 6.5%, 6.8% and 7.1%. Using 6.8%, the indicated value is:
Correct Answer
B) $1,294,118
This question tests the direct capitalization method, where Value = Net Operating Income (NOI) ÷ Capitalization Rate. The correct calculation uses the 6.8% rate specified in the question. Why this is correct: The indicated value is calculated by dividing the NOI of $88,000 by the capitalization rate of 6.8% (expressed as a decimal: 0.068). $88,000 ÷ 0.068 = $1,294,118. Why the other choices are wrong: "$598,400, multiplying instead of dividing" results from incorrectly multiplying NOI by the rate. "$12,941,176, misplacing the decimal" is off by a factor of 10, likely from a decimal error in the rate. "$1,353,846, using the 6.5 percent rate" is the result of using the 6.5% rate from the comparables instead of the 6.8% rate specified for the calculation. Exam tip: In direct cap, always divide NOI by the rate. Double-check that you've converted the percentage rate to its decimal form (e.g., 6.8% = 0.068) before calculating.
Why This Is the Correct Answer
This question tests the direct capitalization method, where Value = Net Operating Income (NOI) ÷ Capitalization Rate. The correct calculation uses the 6.8% rate specified in the question. Why this is correct: The indicated value is calculated by dividing the NOI of $88,000 by the capitalization rate of 6.8% (expressed as a decimal: 0.068). $88,000 ÷ 0.068 = $1,294,118. Why the other choices are wrong: "$598,400, multiplying instead of dividing" results from incorrectly multiplying NOI by the rate. "$12,941,176, misplacing the decimal" is off by a factor of 10, likely from a decimal error in the rate. "$1,353,846, using the 6.5 percent rate" is the result of using the 6.5% rate from the comparables instead of the 6.8% rate specified for the calculation. Exam tip: In direct cap, always divide NOI by the rate. Double-check that you've converted the percentage rate to its decimal form (e.g., 6.8% = 0.068) before calculating.
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