An investment property has a net operating income of $36,000 and a cap rate of 8%. What is the property value?
Question & Answer
Review the question and all answer choices
$288,000
Answer A is incorrect because it mistakenly multiplies the NOI by the cap rate ($36,000 × 0.08 = $2,880) and then multiplies by 100, misunderstanding the inverse relationship between cap rate and value.
$450,000
$360,000
Answer C is incorrect because it uses the NOI directly as the property value without applying the cap rate formula, confusing net operating income with total property value.
$400,000
Answer D is incorrect because it represents the result of dividing the NOI by 0.09 instead of 0.08, indicating a calculation error in applying the cap rate percentage.
Why is this correct?
Answer B is correct because it properly applies the cap rate formula: $36,000 NOI ÷ 0.08 cap rate = $450,000. This calculation follows the fundamental principle that property value equals net operating income divided by the capitalization rate.
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