If the Sale Price was ${a}, the Net Operating Income ${b} and the buyer deducted $300,000 for urgent major repairs. Calculate the True Cap Rate.
(Answer requires two decimal places)
This is the Net Cash Flow for a proposed office building investment for $2,830,000. Answer the following questions below. (1 mark each) If the price was dropped by $300,000 the Internal Rate of Return (IRR) would go {#1} If $250,000 was spent on the roof in year 3 the Net Present Value (NPV) would go {#2} If the financing was reduced from $1,700,000 to $1,300,000 the Internal Rate of Return (IRR) would go {#3} If the sale price at the end of year 5 changed from $2,860,650 to $3,100,000 the Net Present Value (NPV) would go {#4} If the short term reinvestment rate of 2.50% was changed to 0.5% the Modified Internal Rate of Return would go {#5} How much would the price have to drop to achieve an Internal Rate of Return (IRR) of 13.00%? ${#6}
An investor has $400,000 to invest and has two options:
If the lender is using a Debt Service or Coverage Ratio of 1.22 in what year could the building be refinanced and the mortgage increased? The mortgage can be increased in year {#1}
In carrying out discounted cash flow analysis and calculating the Internal Rate of Return (IRR) and the Net Present Value a timing convention is used. Select the appropriate timing convention for each of the following cash flows. (One mark each) Correct answer is identified by “B” for Beginning of year and “E” for End of Year Purchase price or initial investment {#1} Future capital expenditures such as replacing the roof in Year 4 {#2} Creation of a mortgage {#3} Repayment of a mortgage {#4} Payments of Principal and Interest {#5} Revenues {#6} Expenses {#7} Sale of the building at the end of the “Analysis Period” {#8}
In carrying out discounted cash flow analysis and calculating the Internal Rate of Return (IRR) and the Net Present Value (NPV) a “Sign Convention” is used. Select the appropriate sign convention for each of the following cash flows. (One mark each) Purchase price or initial investment {#1} Future capital expenditures such as replacing the roof in Year 4 {#2} Creation of a mortgage {#3} Repayment of a mortgage {#4} Payments of Principal and Interest {#5} Revenues {#6} Expenses {#7} Sale of the building at the end of the “Analysis Period” {#8}
Identify the fundamental difference between the Cap Rate and the Internal Rate of Return (IRR) (One mark each) Only considers one year {#1} Considers many years {#2} Property is never sold {#3} Property is sold at the end of the analysis period {#4} Net Operating Income (NOI) is constant and goes on forever {#5} Income and expenses change every year {#6} Ignores future capital expenditures {#7} Includes future capital expenditures {#8} Excludes financing {#9} Includes financing {#10} Simple and quick rule of thumb {#11} Comprehensive analysis {#12} Ignores the “Time Value of Money” {#13} Takes into account the ‘Time Value of Money” {#14}
If you received the following cash flow and calculated the Interest Rate, the answer is 9.70% If you calculated the Internal Rate of Return (IRR) the answer would be: {#1}%
From a financial perspective which investment: Offers the highest return {#1} Which is the most risky investment? {#2}
The Internal Rate of Return (IRR) is generally {#1} than the Cap Rate.
If the purchase price is dropped by $206,083 what is the Internal Rate of Return (IRR)? {#1}%
If the purchase price is reduced by $430,000 the Internal Rate of Return (IRR) will change from 7.95% to {#1}%
The Internal Rate of Return (IRR) is generally {#1} than the Cap Rate
The Internal Rate of Return (IRR) is generally {#1} than the Cap Rate because of the impact of financial leverage.
If the Internal Rate of Return (IRR) is 11.50% and the short term re-investment rate is 2.5% and the short term borrowing rate is 5.7% the Modified Internal Rate of Return (MIRR) will be {#1} than the Internal Rate of Return (IRR).
In the following example the Modified Internal Rate of Return (MIRR) will be {#1} than the Internal Rate of Return (IRR).
If the Net Present Value (NPV) is positve the return on investment (IRR) is {#1} the Investor's desired return or discount rate.
If the Net Present Value (NPV) is negative the return on investment (IRR) is {#1} the Investor's desired return or discount rate.
How much does the purchase price have to be dropped in order to achieve a return (IRR) of 13.00% ${#1}
If the purchase price was dropped by $206,083 what is the Net Present Value (NPV) at 12.00%? ${#1}
The higher the risk the {#1} the desired return.
Replacing the roof for $352,000 is referred to as a:
When an investor states that they want a return of 9.00% they are referring to:
Which property will most likely show the highest Internal Rate of Return (IRR)?
Prudent investment analysis involves balancing the investment return against the risk. Select the investment that has the healthiest balance between the risk and the reward
Based on the financial information shown below how risky is this investment?
What's the impact of financial leverage for this investment?
Why is the Internal Rate of Return (IRR) higher with financing?
Why is the Net Present Value (NPV) at 13% with financing of ($180,036) less than the Net Present Value (NPV) without financing of ($526,867)?
Because of the positive impact of financial leverage
Because different discount rates were used in calculating the Net Present Value (NPV) with and without financing
Because different purchase prices were used in calculating the Net Present Value (NPV) with and without financing
If the Cap Rate is calculated using the "Sale Price" and next years "Net Operating Income (NOI)" which one of the following statements is most correct?
Which of the following statements are correct (1 mark each)
In buying a property the buyer may have to take over a mortgage with an interest rate higher than the current interest rate because the mortgage can’t be paid off or the penalty for paying off the mortgage is very high. To facilitate the deal the buyer can:
Which of the following financial measures can be used when carrying out investment analysis to determine the potential mortgage loan amount?
Which would you rather have?
In calculating the Internal Rate of Return (IRR) for this investment the:
time value of money was taken into account
the time value of money was ignored
Can't tell
Which items are not included when calculating the yearly cash flows from an investment in an income property?
Which of the following is not included when calculating the operating cash flow?
Which of the following financial measures does not take into account the "Time Value of Money"? (1 mark each)
If the Internal Rate of Return (IRR) is 9.75% which one of the following statements is correct?
To calculate the return on investment for an uneven cash flow such as the one below you:
Which of the following is true? Discounted Cash flow analysis takes into account:
The diagram below shows the projected lease rates and renewals for two comparable properties. Which is the most valuable property?
Which of these two properties would provide the highest Internal Rate of Return (IRR)?
Which property would provide the highest Internal Rate of Return?
The best way to decide which investment provides the highest return is to:
In carrying out long term real estate investment analysis the "Analysis Period" refers to:
Discounted cash flow analysis refers to:
The reinvestment assumption used when calculating the Internal Rate of Return (IRR)
For a typical Cap Rate around 7% to 8% the Internal Rate of Return (IRR) before tax is around:
Under what conditions does the Cap Rate come close to being equal to the Internal Rate of Return (IRR)? (One mark each)
If the Internal Rate of Return (IRR) is 11.19% when calculating the Internal Rate of Return (IRR) losses are borrowed at:
If an Investor's desired return or discount rate is 14% and the Internal Rate of Return (IRR) is 12.75%. Positive cash flows when calculating the Internal Rate of Return (IRR) are reinvested at:
The Modified Internal Rate of Return (MIRR):
The Investor's discount rate is used to calculate the:
Which one of the following might be a good reference point in deciding on the "Discount Rate" or "Desired Return" when calculating the Net Present Value (NPV)?
Which statement is correct?
The following "Present Value Appraisal Report" shows how much of the Present Value (PV) is being generated by the "Net Operating Income" and how much by the Present Value of the Sale Reversion. Which statement is correct?
The Present Value calculations are made using the financing but not the capital expenditures
The Present Value calculations exclude capital expenditures and financing
The Present Value calculations take into account capital expenditures and financing
Which one of the following statements is correct?
Which is the most risky investment from a financial perspective?
Year
Investment A
Investment B
0
<1,000,000>
<1,600,000>
1
600,000
200,000
2
500,000
300,000
3
400,000
4
5
Total
Property A
Property B
When carrying out investment analysis which are the best financial measures for assessing the potential investment risk? (1 mark each)
Which investment would be considered the least risky?
The “Undepreciated Balance” refers to:
The term “Amortization” in connection with an asset refers to:
Spreading an intangible asset such as a leasing fee over its useful life such as the first term of the lease
Is a form of revenue from the investor’s perspective
Is an operating expense
Which of the following can be claimed as an expense for tax purposes (One mark each)
Which of the following are expensed through depreciation claims for tax purposes (One mark each)
The Return on Investment always refers to the Return on Equity (Cash on Cash)
The Internal Rate of Return (IRR) is not the same as the Return on Equity (Cash on Cash)
Sometimes the best strategy if you own a property is to refinance the first mortgage and take the funds from refinancing and invest in another property
The "Apparent Cap Rate" ignores the hidden factors that have influenced the price such as the buyer discovering that $350,000 has to be spent on replacing the roof and major repairs to the HVAC system.
The Cap Rate approach is an excellent approach to valuing an income property with the following lease arrangement.
There may be conditions in the mortgage contract that makes it difficult to sell the property
In order to put a deal together the seller can always provide a second mortgage to lower the equity required by the buyer
If you refinance a property and take money out of the property and invest in another property you will have to pay capital gains tax.
A Cap Rate can be directly compared with the Internal Rate of Return (IRR) because they both are a form of Return on Investment (ROE)
The Cap Rate is always higher than the Internal Rate of Return (IRR) because financing reduces the cash flow before tax, which in turn lowers the Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is always lower than the Cap Rate because the mortgage interest payment lowers the operating costs, which in turn reduces the Internal Rate of Return (IRR)
The Cap Rate and the Internal Rate of Return (IRR) are similar measures and therefore can be compared.
The Modified Internal Rate of Return (MIRR) is more commonly used than the Internal Rate of Return (IRR).
Interest payments on a mortgage cannot be deducted for tax purposes because it is a financial cost not an operating expense
A full recapture of depreciation occurs when the value of the improvements on sale is greater than on acquisition
A partial recapture of depreciation occurs when the value of the improvements on sale is greater than on acquisition
A partial recapture of depreciation occurs when the value of the improvements on sale lies between the value of the improvements on acquisition and the undepreciated balance
Recaptured depreciation is taxed at the same rate as the capital gain
A capital gain is created when the value of the improvements on sale is greater than the undepreciated balance
A capital gain for real estate is taxed at the same rate as income tax
Land is a depreciable asset.
If the value of the improvements on sale is less than the undepreciated balance there will be no recaptured depreciation tax to be paid when the building is sold.
When a building is sold the seller may have to pay recaptured depreciation because they claimed too much depreciation during the ownership period.
Is the following statement correct? Properties that are hard to sell because of tax implications have the following characteristics:
There is a possibility that the investor doesn’t receive any funds from the sale of the property after paying off the mortgage, capital gain tax and the recaptured depreciation tax. Instead they could end up owing money.
When an investor sells a property that they have owned for a long time they will always receive funds from the sale because the property has increased in value
Recaptured Depreciation Tax occurs when the value of the improvements on sale is greater than the undepreciated value
Recaptured Depreciation Tax occurs when the value of the improvement on sale is more than the undepreciated value
Recaptured Depreciation Tax occurs when the value of the improvements on sale is more than the undepreciated value
Recaptured Depreciation Tax occurs when the value of the improvements on sale equals the undepreciated value
Recaptured Depreciation Tax occurs when the value of the land on sale is less than the value of the land on acquisition