Real Estate Principles Chapter 14

An apartment property has a projected net income of $15,000 per year, and its projected net sales price after five years is $300,000. Considering its risk, you require a 14% annual return on this investment. How much would you be willing to pay for it today?

$207,306.81

Kathy currently has $15,000. How much will she have after 8 years if she leaves it invested at 8.5% with annual compounding?

$28,809.07

You want to buy a new sports care five years from now, and you plan to save $5,800 per year beginning today. You will deposit your savings at the beginning of each year in an account that pays 6% interest. How much will you have in the account after making the 5th deposit, 5 years from now?

$34,657

Ben Franklin invested 1,000 pounds (about $50,000 today) at the beginning of the year 1785. Assume the average annual return he earned 1785 to the end of 1984 (200 years) was 2.4%. How much was Franklin's investment worth at the end of 1984? (Round your answer to the nearest cent).

$5,740,653.48

You just inherited some money, and a broker offers to sell you an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?

$62,142

What is the present value of an apartment building that generates an after-tax cash flow of $30,000 in year one, $32,000 in year two, $35,000 in year three, $20,000 in year four, and $21,000 in year five? Assume that the discount rate is 16% (round to the nearest cent).

$93,110.50

In the context of the real estate appraisal business, the IRR is often referred to as the "total yield," which comprised of _____________.

-appreciation yield -current yield

Future benefits are discounted because of _____________________>

-opportunity cost -risk

Which of the following characteristics describe(s) the type of properties that are the focus of the quarterly RERC survey?

-relatively new -values greater than $10 million

Educational Realty Corporation is considering a student housing investment which is expected to produce $41,000 at the end of every year for three years. If the company invests $100,000 today, what is the IRR of this investment?

11.11%

Linda is developing an apartment building in New York City that she expects to own for 10 years. She requires an 18% IRR on such an investment. The current 10-year Treasury bond (T-bond) yield is 4%. What is the required risk premium on Linda's investment.

14%

Which of the following statements is correct?

Timelines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

Calculation of the future value of a house in 5 years growing at an expected rate is called _______________.

compounding

Ceteris paribus, a change in the discount rate affects a 15-year loan more than a 30-year loan.

false

Opportunity cost is the return the investor is forgoing on an alternative investment of equal risk in order to invest in the current opportunity.

true

The U.S. Federal Reserve ("The Fed") periodically increase interest rates when the risk of overheated economy is perceived. Rate hikes are viewed as bad for real estate investors because the present value of future cash flows is inversely related to the magnitude of the interest rate used for discounting.

true

The average annual return for the S&P 500 since its inception in 1928 through 2014 is approximately 10%. Assume a person invested $1.00 in the S&P 500 index every year since the end of 1928. It would have grown into $3,628.87 by the end of 2014.

true

Timelines are useful because they allow us to visualize the time pattern of money returns.

true

Jenny wants to go to Europe four years from now. She can save $4,000 per year, beginning one year from today. She plans to invest the funds in the S&P 500 ETF that she thinks will return 10% per year. Under these conditions, how much will she have saved after she makes the 4th deposit, 4 years from now?

$18,564

Last year, Harvey Realty Inc.'s sales were $450 million. If sales grow at 12% per year, how large (in millions) will they be 5 years later?

$793.05

Suppose an investor is interested in purchasing the following income producing property at a current 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. At the end of Year 4, the property has a sales value of $500,000. Assuming that the required rate of return is 12%, what is the NPV of the project?

$9,889.56

Suppose an investor is interest in purchasing the following income producing property at a price of $450,000. The investor 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 estimated proceeds from selling the property at the end of year four is $500,000, what is the IRR of the project?

12.69%

Assume an industrial building can be purchased for $1,500,000 today. The investment 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) on this investment.

6.78%

Arbitrage means taking advantage of temporary differences in market prices to make a profit. Assume two real estate companies, A and B, both operate in New York area and focus on office properties. You have determined that Company A's shares have an intrinsic value of $20 per share but are trading at $22 per share, while Company B's shares are worth $25 per share but are trading at $22 per share. What would a rational investor (or arbitrageur) do to take advantage of this price difference (no short-selling constraint and transaction fee)?

Sell short company A's shares, buy the same number of company B's shares

Which of the following investments is generally considered the least risky?

U.S. Treasury securities

Under certain conditions, a project may have more than on IRR. One such condition is when, in addition to the initial investment(at time "zero"), a negative cash flow (or cost) occurs at the __________ of the project's life.

end

True or false: Theoretically, treasury bills (T-bills) are securities with a maturity less than 1 year. They are typically viewed as riskless securities, therefore the return on them should be zero.

false

An investment should be made if the NPV is ___________ than zero.

greater

Which of the following types of real estate investments is the generally considered the least risky?

office properties where the tenant pays all of the operating expenses