ICA Chapter 40

Calculate the net present value of a property purchased for $500,000. The annual total income is $40,000 the first year, $45,000 the second, $50,000 the third, $55,000 the fourth, and $60,000 the fifth. Anticipated net sale price at the end of year five is $600,000. The yield rate is determined to be 12%. $16,632 $17,880 $15,998 $16,124

$16,632 f [FIN] 500,000 [CHS] [ g ] [CFo] 40,000 [ g ] [CFj] 45,000 [ g ] [CFj] 50,000 [ g ] [CFj] 55,000 [ g ] [CFj] 660,000 [ g ] [CFj] 12 [ i ] [ f ] [NPV]

Generally, when NPV is positive, the investment is: Acceptable Unacceptable Not risky Very risky

Acceptable

If the NPV is zero, the investment is considered to be: Acceptable Unacceptable NPVs are always greater than zero NPVs never equal zero

Acceptable

When analyzing investments with longer holding periods, the concept of refinancing comes into play. What is common practice with regard to assumptions about refinancing? Current market rates and underwriting standards are considered An assumption that refinancing will not occur within the first 5 years or so Both A and B Neither A nor B

Both A and B

When estimating interest rates in net present value calculations, the rates used are typically: Current rates Median rate over past three years Projected rates from AMB's projections Rates for government bonds

Current rates

A Profitability Index of -1 means that the investment: Meets the profitability goals Equals the profitability goals Fails to meet the profitability goals Exceeds the profitability goals

Fails to meet the profitability goals

The primary difference between Internal Rate of Return and Net Present Value is: Internal Rate of Return is about dollars, Net Present Value is about rates Internal Rate of Return is about rates, Net Present Value is about dollars There is no difference between the two Net Present Value is about cash in-flows, Internal Rate of Return is about cash out-flows

Internal Rate of Return is about rates, Net Present Value is about dollars

Which of the following is a tool for determining whether or not to make an investment? INT RND PMT NPV

NPV

Critics of using net present value claim: The NPV concept is outdated IRR is the method of choice NPV may not meet all investors' needs There can be more than one IRR

NPV may not meet all investors' needs

According to Harrison's Illustrated Dictionary of Real Estate Appraisal, the _____________ is used to rate the quality of an investment. Present value Future value Net present value Net future value

Net present value

The difference between the present value of all positive cash flows and the present value of negative cash flows is referred to as: Internal ate of return Net present value Profitability index Leverage

Net present value

The difference between the present value of future cash in-flows and cash out-flows is: Net present value Internal rate of return Investment index Forecasting index

Net present value

"Break-even figure" or "break-even point" are other terms for: Profitability Index Net Present Value Leverage Payback Period

Payback Period

The term used for the period required for cumulative income to equal initial investment is known as the: Cash Recovery period Investment Recovery period Net Present Value Payback Period

Payback Period

When the initial out-go is divided into the present value of the in-flows, the result is called the: Alpha index Beta index Cash flow index Profitability index

Profitability index

If the investment required for two different properties is different, the Net Present Values will differ even if all other factors are alike. True False

True

If the investment required for two different properties is different, the net present values will differ even if all other factors are alike. True False

True