REE 3043 Exam 5 Questions and
Answers All Correct
Many investors use mortgage debt to help finance capital investment for income-
producing real estate. In doing so, the owner will receive income as long as the property
produces enough income to cover all operating and capital expenditures, the mortgage
payment, and all state and federal income taxes. Therefore, the owner's claim is
commonly referred to as a
A. primary claim.
b. joint claim.
C. residual claim.
D. superior claim. - Answer ✔ C
While net present value (NPV) and internal rate of return (IRR) analysis both may be
used as investment decision criteria, there are some limitations to the IRR method that
make its use as an investment criterion problematic in certain situations. All of the
following are limitations of the IRR method except
A. IRR calculations assume that cash flows are reinvested at the IRR, rather than at the
actual rate that investors expected to earn on reinvested cash flows.
B. with the IRR decision criterion, multiple solutions may exist for investments where the
sign of the cash flows changes more than once over the expected holding period.
C. the IRR methodology cannot be used to make comparisons across different
investment opportunities.
D. the use of IRR as a decision criterion will not necessarily result in wealth
maximization for the investor. - Answer ✔ C
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
Given the following information regarding an income producing property, determine the
NPV using levered cash flows in your analysis: required equity investment: $270,000;
expected NOI for each of the next five years: $150,000; debt service for each of the
next five years: $125,000; expected holding period: five years; required yield on levered
cash flows: 15%; expected sale price at end of year 5: $2,000,000; expected cost of
sale: $125,000; expected mortgage balance at time of sale: $1,500,000.
A.$245.15
B. $270,245.15
C. $419,264.54
D. $1,435,029.64 - Answer ✔ A
Determine the net present value (NPV) of an investment decision to purchase a
property for $90,000 that will generate annual cash flows of $10,000 per year for eight
years and sell for $80,000 at the end of the eight-year holding period, if the appropriate
discount rate is 10%? (Note: assume payments are made at end of year.)
A. −$2,475
B. −$609
C. +$669.85
D. +$2,475 - Answer ✔ C
Given the following expected cash flow stream, determine the IRR of the proposed
investment in an income-producing property and determine whether or not the
