## Quiz 8 :

Valuation Using the Income Approach

Answer:

The market valuation approach of finding market value of property through income approach includes discounted cash flow analysis, direct capitalization, and effective gross income multiples.

The correct answer is option a.

Explanation

Effective gross income is used to find the market value of property in effective gross income multiples method, and here, discounting of income is not required to find the market value of the property.

Thus, the option b is incorrect.

The discounting of cash flows using an appropriate discount rate estimated by analysts to find the market value of asset is known as discounted cash flow analysis. Here, the discounting rate might be expected yield or required rate of return from the property.

Thus, the option c. and option d. are incorrect.

PGI (Potential Gross Income) is used to find the effective gross income and it is not used to determine market value of property directly. The effective gross income is the difference between the PGI and vacancy and collection losses.

Thus, the option e. is incorrect.

In order to find the market value of property as per the direct capitalization method the projected net operating income over the next 12 months will be divided by the overall capitalization rate.

Thus, the correct answer is option a.

Answer:

Option "a" final estimate of value represents the actual worth of any asset after depreciation and other cost associated with that particular asset. Thus this option is not correct.

Option "b" reconciled estimate of value represents the modified and corrected worth or value of any assets after rectifying the principle errors in the valuation of that asset. Thus this option is not correct.

Option "c" probable sale price refers to the expected price to be set as the selling price of any asset or tangible product. Thus probable sale price is the price which is surely be received by the seller for selling the property, land or some other asset to buyer. Thus this option is not correct.

Option "e" adjusted final sale price refers to the final price set as the selling price for any fixed asset by the seller after being negotiated with the buyer of that particular asset on the features and characteristics of that asset. Thus this option is not correct.

Option "d" indicated value refers to the value shown as a final estimate by marketing approaches to determine the price and worth of a particular asset or other fixed property. Thus this option is correct.

Hence the correct option is

that is indicated value

Answer:

We are asked to use the following information to determine a solution:

You are estimating the value of a small office building. Suppose the estimated NOI for the first year of operations is $100,000.

(a) Calculate the present value of the building and indicated initial cap rate:

If you expect that NOI will remain constant at $100,000 over the next 50 years and that the office building will have no value at the end of 50 years, what is the present value of the building assuming a 12.2% discount rate If you pay this amount, what is the indicated initial cap rate

In order to determine the present value , using your financial calculator and plugin the values as shown in below table:

Table

Hence the present value is $817,078.

In order to determine the initial (going-in) cap rate we need to divide the payment amount by the present value.

Hence the initial cap rate is 12.24%.

(b) Calculate the value of the building and indicated initial cap rate:

If you expect that NOI will remain constant at $100,000 forever, what is the value of the building assuming a 12.2% discount rate If you pay this amount, what is the indicated initial cap rate

The value of the building with NOI remaining constant at $100,000 is calculated using the formula for perpetuity.

Hence the value of the building is $819,672.00.

In order to determine the indicated initial cap rate we need to divide the payment amount by the value of the building.

Hence the initial cap rate is 12.2%.

(c) Calculate the value of the building and indicated initial cap rate:

If you expect the initial $100,000 NOI will grow forever at a 3% annual rate, what is the value of the building assuming a 12.2% discount rate If you pay this amount, what is the indicated initial cap rate

In order to determine the value of the building we need to determine the initial cap rate by subtracting the annual rate from the discount rate.

Hence the initial cap rate is 9.2%.

In order to determine the value of the building we need to divide the payment by the initial cap rate.

Hence the indicated value of the building is $1,086,957.