CFA Practice Question

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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.

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
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