A property has an NOI of $50,000 and a cap rate of 5%. What is the value?
Question & Answer
Review the question and all answer choices
$500,000
Answer A ($500,000) is incorrect because it represents the result of multiplying NOI by the cap rate ($50,000 × 0.05 = $2,500) or incorrectly dividing the cap rate by NOI. This demonstrates a misunderstanding of the valuation formula.
$750,000
Answer B ($750,000) is incorrect and appears to be a random figure that doesn't result from any standard calculation with the given numbers. It may tempt students who are unsure of the formula but recognize that the answer should be higher than $500,000.
$1,000,000
$250,000
Answer D ($250,000) is incorrect as it represents half of the correct answer. This might result from incorrectly multiplying the NOI by the cap rate (without converting to decimal) or other calculation errors.
Why is this correct?
Answer C ($1,000,000) is correct because it properly applies the capitalization formula: $50,000 NOI divided by 0.05 cap rate equals $1,000,000. This follows the fundamental valuation principle that property value equals net operating income divided by the capitalization rate.
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