Net operating income is $120,000. If the capitalization rate moves from 8.0 to 7.5 percent, what happens to the indicated value?
Correct Answer
C) It rises by about 6.7 percent
Why this is correct: Value is calculated as Net Operating Income (NOI) divided by the capitalization rate (R). Initial value: 120,000 dollars / 0.08 = 1,500,000 dollars. New value: 120,000 dollars / 0.075 = 1,600,000 dollars. The increase is 100,000 dollars. Percentage increase: (100,000 / 1,500,000) * 100 = approximately 6.7 percent. Why the other choices are wrong: The choice that it falls by about 6.7 percent is incorrect; a lower cap rate increases value. The choice that it rises by exactly 0.5 percent is wrong; the percentage change in value is not equal to the change in the rate. The choice that it remains unchanged is false; a change in the cap rate directly changes the value indication. Exam tip: Value moves inversely to the cap rate. A small change in R causes a larger percentage change in value.
Why This Is the Correct Answer
Why this is correct: Value is calculated as Net Operating Income (NOI) divided by the capitalization rate (R). Initial value: 120,000 dollars / 0.08 = 1,500,000 dollars. New value: 120,000 dollars / 0.075 = 1,600,000 dollars. The increase is 100,000 dollars. Percentage increase: (100,000 / 1,500,000) * 100 = approximately 6.7 percent. Why the other choices are wrong: The choice that it falls by about 6.7 percent is incorrect; a lower cap rate increases value. The choice that it rises by exactly 0.5 percent is wrong; the percentage change in value is not equal to the change in the rate. The choice that it remains unchanged is false; a change in the cap rate directly changes the value indication. Exam tip: Value moves inversely to the cap rate. A small change in R causes a larger percentage change in value.
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