- CFA Exams
- CFA Level I Exam
- Study Session 15. Alternative Investments
- Reading 39. Private Real Estate Investments
- Subject 4. The income valuation approach

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**CFA Practice Question**

An analyst makes the following estimates about an income-producing property.

Annual property operating expenses = 200,000

Annual vacancy and collection losses = 125,000

Capitalization rate = 10%

Expected rate of inflation = 4%

Annual gross potential rental income = $800,000

Annual property operating expenses = 200,000

Annual vacancy and collection losses = 125,000

Capitalization rate = 10%

Expected rate of inflation = 4%

Using the direct capitalization approach, the property's estimated market value would be:

A. $3,392,857.

B. $4,285,714.

C. $4,750,000.

**Explanation:**(8,000,000 - 200,000 - 125,000)/0.1 = 4,750,000.

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**User Contributed Comments**
7

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

gruszewski |
inflation is included in cap rate |

mm04 |
Why give the inflation rate? Confusing... |

bluff |
The inflation rate is the trick part. I guess. |

ss18 |
rate of inflation not considered |

jdollpru |
the anser to above questions, direct approach just treats property as a pertuity. To solve for a perpetuity, simply divide Payment by rate. Present of value of perpetuity = A/R |

samco |
Don't be fooled by the inflation rate. Never substract interest. |

Shelton |
MV(Perpetuity) = NOI / k = (800k-200k-125k)/10% = 4.75m |