A commercial property generates $120,000 in annual rental income and has operating expenses of $35,000. If the capitalization rate is 8%, what is the estimated property value?

Option B: $1,375,000

This answer ($1,375,000) appears to result from incorrectly using gross rental income instead of NOI in the calculation ($120,000 ÷ 0.08 = $1,500,000) or making an arithmetic error. The capitalization approach specifically requires using Net Operating Income, not gross income, as operating expenses must be deducted to determine the actual income available to service debt and provide return on investment.

Option C: $1,500,000

This answer ($1,500,000) results from incorrectly using gross rental income ($120,000) instead of Net Operating Income in the capitalization formula. The calculation would be $120,000 ÷ 0.08 = $1,500,000. However, the income capitalization approach requires subtracting operating expenses first to determine NOI, as investors are concerned with net cash flow, not gross revenue.

Option D: $1,937,500

This answer ($1,937,500) appears to result from a significant calculation error, possibly multiplying instead of dividing, or using an incorrect cap rate. The income capitalization approach specifically requires dividing NOI by the cap rate, and no reasonable manipulation of the given figures ($85,000 NOI and 8% cap rate) would yield this result.