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**CFA Practice Question**

A small office building that recently sold for $175,000 generates annual net operating income of $27,500. Using a 12% capitalization rate, how much NOI should a property generate under the income approach if the market value of the building is $195,000?

A. $23,400

B. $26,400

C. $171,600

**Explanation:**Under the income approach, assuming a capitalization rate of 12%, a building with a market value of $195,000 should generate NOI of: NOI = MV x k = $195,000 x .12 = $23,400.

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**User Contributed Comments**
4

User |
Comment |
---|---|

samco |
Don't be tricked by the first part of the question. |

copus |
The first part of the question is COMPLETELY irrelevant! |

Mikehuynh |
That how the question may trap us. |

shumwaya |
think of the Cap Rate as the % of the total investment (price of bldg) you receive in the first year of ownership. so you receive 12% of your total investment (195,000) back in the 1st year aka 195,000*.12 = 23,400 |