Exam 19: Investment Decisions: NPV and IRR

While net present value (NPV)and internal rate of return (IRR)analysis both may be used as investment decision criteria,there are some limitations to the IRR method that make its use as an investment criterion problematic in certain situations.All of the following are limitations of the IRR method EXCEPT:

Many investors use mortgage debt to help finance capital investment for income-producing real estate.In doing so,the owner will receive income as long as the property produces enough income to cover all operating and capital expenditures,the mortgage payment,and all state and federal income taxes.Therefore,the owner's claim is commonly referred to as a:

The use of financial leverage in purchasing an income-producing property can affect the amount of cash required at acquisition,the net cash flows from rental operations,the net cash flows from the eventual sale of the property,and the ultimate return on invested equity.Assuming the going-in IRR is greater than the effective borrowing cost,if an investor increases his leverage rate,say from 75% to 80%,we would expect which of the following to occur?

While the general concepts of investment value and market value are very similar,there is an important distinction between the two.All of the following statements regarding investment value are true EXCEPT:

The use of financial leverage when investing in real estate is a double-edged sword.While increased leverage may allow the investor to "purchase" higher expected returns,the "price" of doing so is an increase in which of the following risks?

Net present value (NPV)is interpreted using the following decision rule: The investor will purchase the property as long as the NPV is:

It is common for investors in real estate to use mortgage debt to help finance capital investment.The use of debt can have a profound impact on the expected cash flows for a particular property.Which of the following terms refers to cash flows that represent the property's income after subtracting any payments due to the lender?

The internal rate of return (IRR)on a proposed investment is the discount rate that makes the net present value of the investment:

Given the following information,calculate the going-out cap rate.Estimated holding period: 5 years,NOI for year 1: $120,000,NOI for year 5: $150,000,NOI for year 6: $155,250,Expected sale price: $1,350,000.

Just as it is important for an investor to consider the impact of financial leverage on her return,it is also necessary to account for the effect of income taxes.How would the presence of income taxes impact the levered going-in IRR?

Given the following information,calculate the appropriate after-tax discount rate.Tax rate on comparable risk investment: 35%,Investor's before-tax opportunity cost: 12%,Capitalization rate: 8%.

An important piece of criteria for investors to consider when deciding between real estate investment opportunities and investing in stocks or bonds is the effect of income taxes on their return.For most investors,the effective tax rate on commercial real estate is:

Given the following information,calculate the before-tax equity reversion (BTER).NOI: $89,100,Annual Debt Service: $58,444,Net Sale Proceeds: $974,700,Remaining Mortgage Balance: $631,026.

Given the following information,calculate the NPV for this property.Initial cash outflow: $200,000,Discount rate: 15%,CF for year 1: $25,876,CF for year 2: $23,998,CF for year 3: $23,013,CF for year 4: $22,105,CF for year 5: $144,670.

Given the following information,calculate the estimated terminal value of the property at the end of its holding period.Going-out cap rate: 9%,Estimated holding period: 5 years,NOI for year 5: $100,500,NOI for year 6: $102,000.

In discounted cash flow analysis,the industry standard for pro forma cash flow projections of investment properties is typically:

In discounted cash flow (DCF)analysis,the sale price of the property must be estimated at the end of the expected holding period.The most common method for determining the terminal value of the property is the:

To overcome the potential shortcomings of single-year decision making metrics,many investors in real estate also perform multiyear discounted cash flow (DCF)valuation.DCF valuation differs from the single-year ratio analysis in all of the following ways EXCEPT:

Which of the following terms refers to the present value of the right to receive a lump sum payment of $1 at the end of a particular year,given a specified discount rate?

Changes in the discount rate used to complete net present value analysis can have a significant impact on the estimated value of the investment and therefore affect the overall investment decision.As the required internal rate of return (IRR)increases,the net present value will: