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 investment should be pursued
using IRR as your decision-making criteria: investment horizon: five years; expected yearly cash
flow in each of the next five years: $127,628; expected sale price at end of five years:
$1,595,350; required return on equity: 5%; current market price of property: $1,750,000
A. IRR is 4.92%; decision is to invest.
b. IRR is 4.92%; decision is to not invest.
C. IRR is 5.72%; decision is to invest.
D. IRR is 5.72%; decision is to not invest. - answer✔✔C
To overcome the potential shortcomings of single-year decision-making metrics, many investors
in real estate also perform multiyear discounted cash flow (DCF) valuation. DCF valuation
differs from the single-year ratio analysis in all of the following ways except
A. only with DCF must the investor estimate an appropriate investment horizon accounting for
how long she will hold the property.
B. only with DCF must the investor select the appropriate yield at which to discount all expected
future cash flows.
C. only with DCF must the investor make explicit forecasts of the property's net operating
income for each year in the expected holding period.
D. only with DCF must the investor use a defensible cash flow estimate that incorporates
appropriate measures of income and expenses. - answer✔✔D
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
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