Unit 8 Exam: Discounted and Non-Discounted Investment Criteria Flashcards
An investor in the 28% bracket purchases a small multi-office property for $350,000 with a $100,000 cash down payment. The loan for $250,000 is payable at 10% interest for only 10 years. The property generates $50,000 annual gross income. Its operating expense ratio is 30%. The land is booked at $50,000 and the improvements at $300,000 with depreciation using the 39% straight-line rate.
The annual cash-on-cash return on this investment is:
a. 3.6%
b. 10%
c. 28%
d. 30%
b. 10% (p. 102)
100,000 cash invested
50,000 annual gross income
- 15,000 operating expenses (50,000 x 30%)
= 35,000 net operating income
- 25,000 interest (250,000 x 10%)
= 10,000 annual cash flow
/ 100,000 cash invested
=10% cash on cash return
A residential rental property has gross collected rents of $38,000 per month after vacancy and collections. Operating expenses are $13,300 per month. Mortgage money can be borrowed at 4.8% per annum. Comparable properties have sold recently on a 7 cap. Assuming a 20% down payment, what is the indicated value of the property, rounding to the nearest dollar?
a. $3,752,228
b. $4,234,286
c. $4,726,771
d. $13,588,818
b. $4,234,286 (p. 105)
456,000 (38,000 x 12 = gross annual revenue)
-159,600 (13,300 x 12 = operating expenses)
= 296,400
/ .07 (7% cap rate)
= 4,234,286 indicated value
Assume the same property and numbers as in the prior question. An investor desires to add a security system to each unit at a one-time cost of $5,700, plus $247/mo. in monitoring expenses. The added security will increase revenues by $950/mo. How much would these changes increase the value of the property?
a. it is unchanged
b. $114,814
c. $120,514
d. $126,214
c. $120,514 (p. 105)
467,400 (456,000 + [950 x 12] = adjusted gross revenue)
-162,564 (159,600 + [247 x 12] = adjusted exp.)
= 304,836
/ .07 (7% cap rate)
= 4,354,800 adjusted indicated value
-4,234,286 original indicated value
=120,514 difference in indicated value
Which investment analysis tool fails to account for operating expenses?
a. GRM
b. IRR
c. capitalization of NOI
d. CoC
a. GRM (p. 100)
“The GRM has the advantage of being very easy. The drawback is that it does not take into account differing expenses for different properties.”
Which investment analysis tool considers multiple years of cash flow?
a. GRM
b. IRR
c. capitalization of NOI
d. CoC
b. IRR (p. 112)
“The IRR is a rate of discount at which the present worth of future cash flows is exactly equal to the initial capital investment.”
What are the two most common financial calculation tools?
a. excel and lotus 123
b. excel and 10bii
c. 10bii and T1359
d. T1359 and four-function calculator
b. excel and 10bii (p. 99)
“Very few calculations are faster and easier with financial calculators, financial apps, or an Excel spreadsheet. The most common financial calculator is the Hewlett Packard HP 10bii, generally called the “Ten B2”.”
Who would prefer to use pro forma NOI for valuation purposes?
a. IRS
b. lenders
c. buyers
d. sellers
d. sellers (p. 109)
“Sellers will say, “I am not selling yesterday’s NOI. The value of this property is the value in your hands, which is tomorrow’s NOI.”
Which of the following analytical tools employs the concept of money tomorrow being worth less than money today?
a. IRR
b. leverage
c. CoC
d. RFP
a. IRR
Which of the following takes risk into account?
a. profitability index
b. cap rate
c. NOI
d. nominal rate
b. cap rate (p. 104)
“The capitalization of income model takes into account only risk and management headaches. An investor who desired no risk and no management headaches would invest in treasuries.)
When analyzing the expenses incurred in operating a commercial investment property, which of the following is most often overlooked?
a. maintenance
b. reserves
c. utilities
d. management
d. management
