The internal rate of return on an investment is the discount rate at which:
Correct Answer
C) The present value of cash flows equals the initial investment
Why this is correct: The Internal Rate of Return (IRR) is the discount rate that makes the net present value of all projected cash flows (including the reversion) equal to the initial equity investment. In other words, it is the rate at which Present Value of Cash Flows = Initial Investment. Why the other choices are wrong: "The reversion exactly equals the original purchase price" is not the definition of IRR. "The property's NOI equals its debt service" describes a Debt Coverage Ratio of 1.0. "The expense ratio reaches the market average" is unrelated to IRR calculation. Exam tip: IRR is the 'solve-for' discount rate in a DCF that makes NPV = 0. It represents the project's yield to the equity investor.
Why This Is the Correct Answer
Why this is correct: The Internal Rate of Return (IRR) is the discount rate that makes the net present value of all projected cash flows (including the reversion) equal to the initial equity investment. In other words, it is the rate at which Present Value of Cash Flows = Initial Investment. Why the other choices are wrong: "The reversion exactly equals the original purchase price" is not the definition of IRR. "The property's NOI equals its debt service" describes a Debt Coverage Ratio of 1.0. "The expense ratio reaches the market average" is unrelated to IRR calculation. Exam tip: IRR is the 'solve-for' discount rate in a DCF that makes NPV = 0. It represents the project's yield to the equity investor.
More income-approach Questions
In a percentage lease, rent is commonly structured as:
Escalation clauses and expense stops in a lease matter to the income analysis because they:
In a DCF, what is the reversion?
Potential gross income differs from effective gross income in that PGI assumes:
The reversion in a discounted cash flow model represents:
Two identical buildings differ only in risk: one has a single tenant on a short lease, the other five tenants on staggered terms. How do their cap rates compare?
Contract rent on a leased office is $30 per sq ft; market rent is $26. The $4 difference is called:
Building A (new, credit tenant, 20-year lease) and Building B (older, month-to-month tenants) sell the same week. Their cap rates should differ how?
An appraiser is analyzing a 15-unit apartment building. Market research indicates a 6% vacancy rate is typical for similar properties, but this property's historical vacancy has averaged 4%. The subject has experienced a 1% collection loss (uncollectible rents) over the past two years. When estimating effective gross income for the subject, what vacancy and collection loss percentage should the appraiser apply?
An overall rate extracted from a sale whose NOI excluded reserves, applied to a subject NOI that includes them, will:
People Also Study
Valuation Principles & Procedures
25% of exam
Property Description & Analysis
20% of exam
Market Analysis & Highest/Best Use
15% of exam
Appraisal Math & Statistics
15% of exam
USPAP (Ethics & Standards)
15% of exam
Previous Question
A developer proposes a mixed-use project with phased leasing and irregular cash flows: $0 NOI in Years 1–2 (leasing-up period), $420,000 in Year 3, $610,000 in Year 4, and $750,000 in Years 5–10. The reversion is $9.2 million at the end of Year 10. Which statement best explains why a single overall capitalization rate would be inappropriate for valuing this property?
Next Question
A building's rent roll totals $120,000 at full occupancy. Vacancy and collection loss is 5% and laundry income adds $4,800. What is effective gross income?