REE3043 EXAM 5 QUESTIONS WITH
CERTIFIED ANSWERS
A client has requested advice on a potential investment opportunity involving an
income-producing property. She would like you to determine the internal rate of return of
the investment opportunity based on the following information: expected holding period:
years; end of first year NOI estimate: $113,900; NOI estimates in subsequent years will
grow by 5% per year; price at which the property is expected to be sold at the end of
year 5: $1,615,205.22; current market price of the property: $1,475,667.71.
A. -15.30%
B. 8.60%
C. 9.86%
D. 10.00% - Answer-D
Given the following information, calculate the appropriate after-tax discount rate: tax
rate on comparable risk investment: 35%; investor's before-tax opportunity cost: 12%;
capitalization rate: 8%.
A. 2.8%
B. 4.2%
C. 5.2%
D. 7.8% - Answer-D
Given the following information regarding an income producing property, determine the
unlevered internal rate of return (IRR): expected holding period: five years; 1st year
expected NOI: $89,100; 2nd year expected NOI: $91,773; 3rd year expected NOI:
$94,526; 4th year expected NOI: $97,362; 5th year expected NOI: $100,283; debt
service in each of the next five years: $58,444; current market value: $885,000; required
equity investment: $221,250; net sale proceeds of property at end of year 5: $974,700;
remaining mortgage balance at end of year 5: $631,026.
A. 10.6%
B. 12.2%
C. 22.9%
D. 33.4% - Answer-B
It is common for investors in real estate to use mortgage debt to help finance capital
investment. The use of debt can have a profound impact on the expected cash flows for
a particular property. Which of the following terms refers to cash flows that represent the
property's income after subtracting any payments due to the lender?
A. levered cash flows
B. unlevered cash flows
C. discounted cash flows
D. compounded cash flows - Answer-A
Based on your understanding of the differences between levered and unlevered cash
, flows, which of the following is an example of a levered cash flow?
A. net operating income
B. net sale proceeds
C. sale price
D. before-tax cash flow - Answer-D
Given the following information, calculate the before-tax equity reversion (BTER): NOI:
$89,100; annual debt service: $58,444; net sale proceeds: $974,700; remaining
mortgage balance: $631,026.
A. $30,656
B. $343,674
C. $572,582
D. $885,600 - Answer-B
The internal rate of return (IRR) on a proposed investment is the discount rate that
makes the net present value of the investment
A. greater than zero.
B. equal to zero.
C. less than zero.
D. greater than the opportunity cost of not investing. - Answer-B
Given the following information, calculate the estimated terminal value of the property at
the end of its holding period: going-out cap rate: 9%; estimated holding period: five
years; NOI for year 5: $100,500; NOI for year 6: $102,000.
A. $1,113,333
B. $1,116,667
C. $1,133,333
D. $1,166,667 - Answer-C
Suppose an industrial building can be purchased for $2,500,000 and is expected to
yield cash flows of $180,000 in each of the next five years. (Note: assume payments are
made at end of year.) If the building can be sold at the end of the fifth year for
$2,800,000, calculate the IRR for this investment over the five-year holding period.
A. 0.09%
B. 4.57%
C. 9.20%
D.10.37% - Answer-C
