NOI is $154,000 and the market overall rate is 6.8%. The indicated value is:
Correct Answer
A) $2,264,706
Why this is correct: Value (V) is estimated by dividing the Net Operating Income (NOI) by the overall capitalization rate (R). Calculation: V = NOI / R = $154,000 / 0.068 = $2,264,705.88, which rounds to $2,264,706. Why the other choices are wrong: '$1,047,200, multiplying instead of dividing' results from NOI × Rate. '$10,472,000, misplacing the decimal point' comes from dividing by 0.0068. '$2,090,000, applying a rounded seven percent' uses 0.07 ($154,000 / 0.07 = $2,200,000). Exam tip: Value = NOI / Cap Rate. Double-check your decimal placement when dividing by a percentage.
Why This Is the Correct Answer
Why this is correct: Value (V) is estimated by dividing the Net Operating Income (NOI) by the overall capitalization rate (R). Calculation: V = NOI / R = $154,000 / 0.068 = $2,264,705.88, which rounds to $2,264,706. Why the other choices are wrong: '$1,047,200, multiplying instead of dividing' results from NOI × Rate. '$10,472,000, misplacing the decimal point' comes from dividing by 0.0068. '$2,090,000, applying a rounded seven percent' uses 0.07 ($154,000 / 0.07 = $2,200,000). Exam tip: Value = NOI / Cap Rate. Double-check your decimal placement when dividing by a percentage.
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Previous Question
A 3-story office building is leased to a single tenant under a 10-year gross lease with 7 years remaining. The tenant pays a flat $36,000 annual rent, which includes all operating expenses. Market rent for similar space is $30,000 annually *net* of expenses, and typical operating expenses for such properties average $12,000 per year. What is the annual effective gross income attributable to the leasehold interest for valuation purposes?
Next Question
An appraiser is developing a discounted cash flow (DCF) model for a newly constructed office building with a 7-year holding period. The property is expected to generate net operating income (NOI) of $250,000 in Year 1, increasing at 3% annually thereafter. The reversion value at the end of Year 7 is estimated at $4,200,000 using a terminal capitalization rate of 6.5%. The investor’s required yield (discount rate) is 7.2%. Which component of the DCF model must be discounted using the 7.2% rate?