Real Estate Chapter 14
A property owner has set up a contract in which he agrees to sell a warehouse five years from now to the tenant who currently leases the space. The tenant has agreed to continue to pay $20,000 in rent at the end of each year, including year 5, at which time he will purchase the building for an additional $1,500,000. Assuming the required rate of return on a similar investment is 10% (annual), how much is this deal presently worth to the original owner of the property? A) $1,007,197.20 B) $1,014,779.29 C) $2,281,452.80 D) $2,293,663.00
$1,007,197.20
Suppose a bank decides to make a mortgage loan to an individual for the purchase of a home. The homeowner will pay the bank $1,500 per month in mortgage payments for the next thirty years. The bank will collect the mortgage payments at the end of the month. If the borrower does not default on the loan, how much money will the bank have accumulated if they could reinvest the monthly income at an annualized rate of 5% for the entire investment horizon? A) $23,058.68 B) $99,658.27 C) $279,422.43 D) $1,248,387.95
$1,248,387.95
The purchase price of an income-producing property today is $570,000. After analysis of the expected future cash flows, expected sales price, and expected yield, the investor determines that the future cash flows have a present value (PV) of $580,000. Taking into consideration the price of the property today, what is the net present value (NPV) of this investment opportunity, and should the investor take the deal? A) $10,000; Yes B) $10,000; No C) -$10,000; Yes D) -$10,000; No
$10,000; Yes
Assume that an individual puts $10,000 into a savings account that pays 3% interest, with interest being compounded monthly. The individual plans to withdraw the balance in five years to buy a car. If he does not make any further deposits over this period, how much will the individual be able to put towards his purchase? A) $10,125.63 B) $11,592.74 C) $11,616.17 D) $58,916.03
$11,616.17
Suppose that a landlord is interested in renting out a two-bedroom apartment for $1,000 a month for the next year. The landlord requires rent to be paid at the beginning of the month, at which point he will deposit the rental check into a local savings account. If the annual interest that the tenant can earn on this account is 5% and interest is compounded monthly, how much will the tenant have in his savings account at the end of the year? A) $12,278.86 B) $12,330.01 C) $13,330.02 D) $15,917.13
$12,330.01
An investor just purchased an office building for $100,000. He knows for certain that he can sell the building for $110,000 in five years. Approximately how much does he need to charge in annual rent in order to achieve a 15% annual return on the deal (rounded to the nearest hundred dollars)? A) $2,500 B) $8,000 C) $13,500 D) $20,500
$13,500
Assume that a piece of land is currently valued at $50,000. If this piece of land is expected to appreciate at an annual rate of 5% per year for the next twenty years, how much will the land be worth twenty years from now? A) $100,898.99 B) $112,633.09 C) $123,860.81 D) $132,664.89
$132,664.89
Suppose you are starting a PhD program with only $1,000 in your savings account. The university has agreed to waive your tuition, cover all of your living expenses, and pay you an additional stipend of $2,000 at the beginning of each month, as long as you teach one course per semester over the course of five years. If your savings account is able to earn 5.5% per year for the five years that you will be in this program, how much will you have accumulated in your savings account by the end of the program if interest is compounded on a monthly basis? A) $136,445.94 B) $137,708.75 C) $139, 077.35 D) $139,708.76
$139,708.76
An investor agreed to sell a warehouse five years from now to the tenant who currently rents the space. The tenant will continue to pay $20,000 rent at the end of each year including year 5 in which he will purchase the building for an additional $150,000. Assuming the investor's required rate of return is 10%, how much is this deal presently worth to the investor who was willing to sell? A) $168,953.93 B) $241, 451.07 C) $363,678.50 D) $1,032,475.67
$168,953.93
Suppose an investor deposits $2,500 in an interest-bearing account at her local bank. The account pays 2.5% interest compounded annually. If the investor plans on withdrawing the original principal plus accumulated interest at the end of seven years, what is the total amount that she should expect to receive assuming interest rates do not change? A) $2,971.71 B) $2,974.89 C) $3,532.43 D) $11,920.93
$2,971.71
Suppose a bank decides to make a mortgage loan to an individual so that she may purchase a home. The homeowner will pay the bank $1,500 per month in mortgage payments for the next thirty years. The bank will collect the mortgage payments at the end of the month. What is this promised stream of cash flows worth to the bank today if they could reinvest the monthly income at an annualized rate of 5% for the entire investment horizon? A) $23,058.68 B) $99,658.27 C) $279,422.43 D) $1,248,387.95
$279,422.43
Upon starting his first job after graduation, Jon has completed the necessary paperwork to set up direct deposit of his paycheck into his savings account. After taxes, medical benefits, and retirement account contributions have been taken out of John's gross salary, he is left with a direct deposit of $4,000 at the end of each month. If John started with no other savings in his account, how much will John have in his savings account at the end of 12 months if he is able to earn an annual interest rate of 3%, with interest being compounded monthly? A) $48, 665.53 B) $48,787.19 C) $56,768.12 D) $58,471.16
$48, 665.53
Suppose your personal financial goal is to retire with $1 million in your savings account. How much must you deposit monthly in an account paying 5% a year (with interest being compounded monthly and your deposits occurring at the end of the month), to accumulate $1,000,000 by your 65th birthday if you begin your deposits on your 22nd birthday? (Note: Assume that you started with no savings in the account prior to your first deposit at age 22 and you do not make a deposit on your 65th birthday.) A) $552.13 B) $701.90 C) $21,282.95 D) $186,354.63
$552.13
Assuming that an investor requires a 10% annual yield over the next twelve years, how much would she be willing to pay for the right to receive $20,000 at the end of year 12? A) $6,053.91 B) $6,372.62 C) $62,768.57 D) $136,273.84
$6,372.62
Suppose an investor deposits $5,000 in an interest-bearing account at her local bank. The account pays 2.5% (annual) with interest compounded monthly. If the investor plans on withdrawing the original principal plus accumulated interest at the end of ten years, what is the total amount that she should expect to receive assuming interest rates do not change? A) $5,105.15 B) $6,400.42 C) $6,418.46 D) $96,790.75
$6,418.46
Suppose an investor has the opportunity to make an investment that promises to pay her $100,000 five years from now. How much should this investor be willing to pay today for this investment opportunity if she could otherwise invest her money in an interest-bearing account that yields 5% (annual) and compounds interest on a monthly basis? A) $77,920.54 B) $78,352.62 C) $97,942.46 D) $432,947.67
$77,920.54
Suppose you have found a tenant who wishes to rent out your vacation home for the next twelve months. You are charging $800 per month in rent. You will collect the first rent payment today and then on the first of the month each month thereafter. What is the value of this investment opportunity to you today if you could reinvest your income at an annual rate of 3% with interest compounded on a monthly basis? A) $7,963.20 B) $8,202.10 C) $9,445.80 D) $9,469.42
$9,469.42
Suppose you own a house that you are renting out to a group of college students for the 10-month academic year. You are charging $1,000 per month in rent. You will collect the first rent payment today and then on the first of the month each month thereafter. What is the value of this investment opportunity to you today if you could reinvest your income at an annualized rate of 6%? A) $9,677.77 B) $9,730.41 C) $9,779.06 D) $11,677.03
$9,779.06
Suppose an investor is interested in purchasing the following income-producing property at a current market price of $450,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: year 1 = $40,000; year 2 = $45,000; year 3 = $50,000; year 4 = $55,000. Assuming that the required rate of return is 12% and the estimated proceeds from selling the property at the end of year 4 is $500,000, what is the NPV of the project? A) $8,829.96 B) $9,889.56 C) $428,113.65 D) $459,889.56
$9,889.56
Suppose that a property can generate cash flows of $10,000 per year for eight years and can sell for $80,000 at the end of the investment period. Assuming a discount rate of 10%, what is the present value of this property? (Assume end of period cash flows in your calculation.) A) $117,320 B) $160,000 C) $133,349 D) $90,670
$90,670
Suppose an investor is interested in purchasing the following income-producing property at a current market price of $490,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: year 1 = $48,000; year 2 = $49,440; year 3 = $50,923; year 4 = $52,451. Assuming that the required rate of return is 14% and the estimated proceeds from selling the property at the end of year 4 is $560,000, what is the NPV of the project? A) -$12,860.53 B) $145,574.52 C) $331,564.96 D) $477,139.47
-$12,860.53
Assume that an industrial building can be purchased for $1,500,000 today, is expected to yield cash flows of $80,000 for each of the next five years (with the cash flows occurring at the end of each year), and can be sold at the end of the fifth year for $1,625,000. Calculate the internal rate of return (IRR) for this transaction. A) 3.14% B) 6.78% C) 9.20% D) 10.37%
10.37%
Suppose an investor is interested in purchasing the following income-producing property at a current market price of $2,500,000. The prospective buyer has estimated the expected cash flows over the next four years to be as follows: year 1 = $100,000; year 2 = $150,000; year 3 = 4$200,000; year 4 = $250,000. If the estimated proceeds from selling the property at the end of year 4 is $3,000,000, what is the internal rate of return (IRR) of the project? A) -33.93% B) 5.72% C) 8.99% D) 10.99%
10.99%
An investor originally paid $22,000 for a vacant lot twelve years ago. If the investor is able to sell the lot today for $62,000, what would his annual rate of return be on this investment (rounded to the nearest percent)? A) 5% B) 7% C) 9% D) 11%
9%
Suppose that an industrial building can be purchased today for $2,500,000. If it is expected to produce cash flows of $180,000 for each of the next five years (assume CFs are received at the end of each year) and can be sold at the end of the fifth year for $2,800,000, what is the internal rate of return (IRR) on this investment? A) 0.09% B) 4.57% C) 9.20% D) 10.37%
9.20%
The internal rate of return (IRR) and the net present value (NPV) are tools that are widely used in real estate investment and finance decision making. An investor would most likely pursue an investment if which of the following circumstances was true? A) The going-in IRR exceeds the investor's required rate of return. B) The going-in IRR is less than the investor's required rate of return. C) The going-in IRR exceeds the NPV. D) The going-in IRR is less than the NPV.
The going-in IRR exceeds the investor's required rate of return.
Which of the following terms refers to a fixed amount of money paid or received at the beginning of every recurring period (i.e., a series of equal lump sums)? A) future value B) present value C) ordinary annuity D) annuity due
annuity due
With compound interest, the investor earns interest on the principal amount invested plus interest on accumulated interest. Which of the following compounding frequencies would yield the investor the greatest ending balance assuming all else is equal? A) daily B) monthly C) quarterly D) annually
daily
You have just had a tenant sign a lease contract that guarantees you payments of $100,000 at the end of each year for the next five years. If you wish to determine the present value of these future cash flows (i.e., the value of this cash flow stream to you today), you would use which of the following time-value-of-money processes? A) compounding B) discounting C) amortizing D) aggregating
discounting
Since investors prefer to have money now rather than later, money received next week, instead of today, is not worth as much to those receiving it, assuming the magnitude of the cash flow in each period is the same. Therefore an adjustment to the prospective cash flows is required. This process is referred to as A) compounding. B) discounting. C) amortizing. D) hedging.
discounting.
Assuming all else the same, the ________ of an annuity due will be ________ that of an ordinary annuity. A)future value; greater than B) present value; equal to C) future value; less than D) present value; less than
future value; greater than
Uncertainty of cash flows can vary significantly across property types. Which of the following property types is often considered to have the most uncertain expected cash flows? A) multifamily B) industrial C) office D) hospitality
hospitality
The Real Estate Research Corporation (RERC) regularly surveys a sample of institutional investors and managers in order to gain insight into the required returns and risk adjustments used by industry professionals when making real estate acquisitions. Most of the properties that RERC examines are large, relatively new, located in major metropolitan areas, and fully or substantially leased. These classifications of properties are commonly referred to as A) investment grade properties. B) speculative grade properties. C) net-lease properties. D) industrial properties.
investment grade properties.
The rate that is used to discount expected future cash flows can be thought of as the return the investor is forgoing on an alternative investment of equal risk. In this framework, the discount rate is being thought of as which of the following? A) net present value B) opportunity cost C) closing cost D) future value
opportunity cost
When discussing time-value-of-money it is necessary to understand some key terminology. Which of the following terms refers to a fixed amount of money paid or received at the end of every recurring period (i.e., a series of equal lump sums)? A) future value B) present value C) ordinary annuity D) annuity due
ordinary annuity
1) Risk is the possibility that actual outcomes will vary from what was expected when the asset was purchased. If investors require a higher rate of return for undertaking more risk, the underlying assumption is that investors are A) risk neutral. B) risk averse. C) risk taking. D) hedging risk.
risk averse
