The subject property has annual NOI of $112,000. Comparable sales indicate a price-to-income multiplier of 12.5, based on annual NOI. What is the indicated value?
Correct Answer
C) $1,400,000
112000×12.5 = 1400000. Common errors: dividing by the multiplier instead of multiplying gives $8,960; dividing the result by 12 as if a monthly figure were needed gives $116,667; annualizing income that is already annual (×12) gives $16,800,000.
Why This Is the Correct Answer
Option C is correct because $112,000 × 12.5 = $1,400,000. The multiplier and the income share the same definition and period, so a straight multiplication gives the indicated value.
Why the Other Options Are Wrong
Option A: $8,960
Option A, $8,960, comes from $112,000 ÷ 12.5, dividing by the multiplier instead of multiplying. The value is $112,000 × 12.5 = $1,400,000.
Option B: $116,667
Option B, $116,667, comes from $112,000 × 12.5 ÷ 12, dividing the result by 12 as if a monthly figure were needed. The value is $112,000 × 12.5 = $1,400,000.
Option D: $16,800,000
Option D, $16,800,000, comes from $112,000 × 12 × 12.5, annualizing income that is already annual. The correct value is $112,000 × 12.5 = $1,400,000.
Multiplier multiplies
A multiplier is multiplied by income; a rate divides income.
How to use: Use this to decide whether to multiply or divide when a problem gives a factor.
Exam Tip
Confirm the income is already on the multiplier's basis before converting anything; extra ×12 or ÷12 steps are common traps.
Common Mistakes to Avoid
- -Dividing income by the multiplier
- -Annualizing income that is already annual
- -Converting the result to a monthly figure
Concept Deep Dive
Analysis
This question tests applying a multiplier to income on its matching basis. The 12.5 multiplier is based on annual NOI, and the income given is annual NOI, so you multiply directly. No conversion between monthly and annual figures is needed.
Background Knowledge
An income multiplier expresses value as a multiple of a defined income. A multiplier on NOI is the reciprocal of an overall capitalization rate; here 12.5 corresponds to an 8% rate. The income definition and period must match the multiplier.
Real-World Application
An appraiser has market evidence that similar properties sell at about 12.5 times annual NOI. She multiplies the subject's annual NOI by 12.5 and compares the result with her direct capitalization indication.
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