Question

18. When the Net Present Value (NPV) of an investment is zero, which of the following statements is true:

a. The required rate of return has not been achieved

b. The discount rate is the rate of return achieved in the investment

c. The investment is achieving a nil return

d. Cashflows are insufficient to meet investment objectives

e. None of the above are correct

19. A property has an annual gross income of $120,000, unrecoverable operating expenses of $18,000 p.a. and interest costs of $5,000 per annum. Using the income approach at a capitalisation rate of 6.5%, what is the value estimate to the nearest whole dollar?

a. $1,569,231

b. $1,492,308

c. $631,250

d. $1,846,154

e. None of the above

20. A property purchased for $800,000 has a gross income of $90,000, unrecoverable operating expenses of $8,000 and is expected to increase in value by $10,000 p.a. What is the total (composite) net return for year one?

a. 9.7%

b. 11.3%

c. 12.5%

d. 11.25%

e. 11.5%

Answer 1

Question 18.Answer is Option b.

NPV = 0, when the discount rate is Internal rate of Return (IRR).

So, NPV = 0, when the discount rate is equal to rate of return achieved in investment

Question 19.Answer is Option b.

Market Capitalization Rate = Net Operating Income (NOI)/Asset Value

Net Operating Income = Annual gross Income - Operating Expenses - Interest Costs per annum

Net Operating Income = $120,000 - $18,000 - $5,000 = $97,000

Market cap rate = 6.5%

6.5% = 97,000/Total Asset Value

Total Asset Value = $1,492,308. Answer

Question 20. Answer is d.

Net Operating Income = $90,000 - $8,000 = $82,000

Total Gains = Net Operating Income + Increase in Value of Property = $82,000 + $10,000 = $92,000

Net Return for Year 1 = Total Gains/Purchase Price = $92,000/$800,000 = 11.5%.