18. When the Net Present Value (NPV) of an investment is zero, which of the foll
ID: 1172397 • Letter: 1
Question
18. When the Net Present Value (NPV) of an investment is zero, which of the following statements is true:
a. The required rate of return has not been achieved
b. The discount rate is the rate of return achieved in the investment
c. The investment is achieving a nil return
d. Cashflows are insufficient to meet investment objectives
e. None of the above are correct
19. A property has an annual gross income of $120,000, unrecoverable operating expenses of $18,000 p.a. and interest costs of $5,000 per annum. Using the income approach at a capitalisation rate of 6.5%, what is the value estimate to the nearest whole dollar?
a. $1,569,231
b. $1,492,308
c. $631,250
d. $1,846,154
e. None of the above
20. A property purchased for $800,000 has a gross income of $90,000, unrecoverable operating expenses of $8,000 and is expected to increase in value by $10,000 p.a. What is the total (composite) net return for year one?
a. 9.7%
b. 11.3%
c. 12.5%
d. 11.25%
e. 11.5%
Explanation / Answer
Question 18.Answer is Option b.
NPV = 0, when the discount rate is Internal rate of Return (IRR).
So, NPV = 0, when the discount rate is equal to rate of return achieved in investment
Question 19.Answer is Option b.
Market Capitalization Rate = Net Operating Income (NOI)/Asset Value
Net Operating Income = Annual gross Income - Operating Expenses - Interest Costs per annum
Net Operating Income = $120,000 - $18,000 - $5,000 = $97,000
Market cap rate = 6.5%
6.5% = 97,000/Total Asset Value
Total Asset Value = $1,492,308. Answer
Question 20. Answer is d.
Net Operating Income = $90,000 - $8,000 = $82,000
Total Gains = Net Operating Income + Increase in Value of Property = $82,000 + $10,000 = $92,000
Net Return for Year 1 = Total Gains/Purchase Price = $92,000/$800,000 = 11.5%.
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