A capitalization rate of 8% on a property with $40,000 NOI indicates a value of:
Question & Answer
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$320,000
Answer A is incorrect because it represents the result of multiplying NOI by the cap rate ($40,000 × 0.08 = $3,200), which is the reverse of the correct formula. This misconception leads to undervaluing the property significantly.
$400,000
Answer B is incorrect because it represents the result of dividing NOI by 10% ($40,000 ÷ 0.10 = $400,000), which uses the wrong cap rate. This demonstrates a careless calculation error that could occur if misreading the cap rate.
$500,000
$480,000
Answer D is incorrect because it represents the result of multiplying NOI by 12 ($40,000 × 12 = $480,000), which incorrectly applies a multiplier instead of using the cap rate formula. This suggests confusion between cap rate calculations and other valuation methods.
Why is this correct?
Answer C is correct because it properly applies the capitalization formula: Value = NOI ÷ Cap Rate. $40,000 divided by 0.08 equals $500,000, which represents the property's value based on its income-producing capability.
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