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