Deck 14: The Effects of Time and Risk on Value

Question 1

When discussing time-value-of-money it is necessary to understand some key terminology.Which of the following terms refers to a fixed amount of money paid or received at the end of every period (i.e.a series of equal lump sums)?

A)Future value
B)Present value
C)Ordinary annuity
D)Annuity due

Answer 1

C

Question 2

The internal rate of return (IRR)and the net present value (NPV)are tools that are widely used in real estate investment and finance decision making.An investor would most likely pursue an investment if which of the following circumstances was true?

A)The going-in IRR exceeds the investor's required rate of return.
B)The going-in IRR is less than the investor's required rate of return.
C)The NPV is negative.
D)The NPV is equal to zero.

Answer 2

A

Question 3

The Real Estate Research Corporation (RERC)regularly surveys a sample of institutional investors and managers in order to gain insight into the required returns and risk adjustments used by industry professionals when making real estate acquisitions.Most of the properties that RERC examines are large,relatively new,located in major metropolitan areas and fully or substantially leased.These classifications of properties are commonly referred to as:

A)investment grade properties
B)speculative grade properties
C)net-lease properties
D)industrial properties

Answer 3

A

Question 4

Assume that an industrial building can be purchased for $1,500,000 today,is expected to yield cash flows of $80,000 for each of the next five years,and can be sold at the end of the fifth year for $1,625,000.Calculate the internal rate of return (IRR)for this transaction.

A)3.14%
B)7.07%
C)9.20%
D)10.37%

Question 5

Uncertainty of cash flows can vary significantly across property types.Which of the following property types is often considered to have the most uncertain expected cash flows?

A)Multifamily
B)Industrial
C)Office
D)Hospitality

Question 6

The rate that is used to discount expected future cash flows can be thought of as the return the investor is forgoing on an alternative investment of equal risk.In this framework,the discount rate is being thought of as which of the following?

A)Net present value
B)Opportunity cost
C)Closing cost
D)Future value

Question 7

Risk is the possibility that actual outcomes will vary from what was expected when the asset was purchased.If investors require a higher rate of return for undertaking more risk,the underlying assumption is that investors are:

A)risk neutral
B)risk averse
C)risk taking
D)hedging risk

Question 8

Suppose an investor deposits $2500 in an interest-bearing account at her local bank.The account pays 2.5% interest compounded annually.If the investor plans on withdrawing the original principal plus accumulated interested at the end of 7 years,what is the total amount that she should expect to receive assuming interest rates do not change?

A)$2,971.71
B)$2,974.89
C)$3,532.43
D)$11,920.93

Question 9

An investor originally paid $22,000 for a vacant lot 12 years ago.If the investor is able to sell the lot today for $62,000,what would his annual rate of return be on this investment?

A)5%
B)7%
C)9%
D)11%

Question 10

Assume an investor with $5000 to invest is considering several alternatives,each covering ten years.Which of the following alternatives would you expect the investor to choose accounting for the time-value-of-money in your calculations?

A)Investor receives $500 at the end of year 1,plus the original $5000 at the end of year 10.
B)Investor receives $50 at the end of each year for 10 years,plus the original $5000 at the end of 10 years.
C)Investor receives $500 at the end of the 10^th year,plus the original $5000.
D)Investor receives $5000 at the end of year 10.

Question 11

An investor agreed to sell a warehouse 5 years from now to the tenant who currently rents the space.The tenant will continue to pay $20,000 rent at the beginning of each year including year five in which he will purchase the building for an additional $150,000.Assuming the investor's required rate of return is 10%,how much is this deal presently worth to the investor who was willing to sell?

A)$168,953.93
B)$241,451.07
C)$363,678.50
D)$1,032,475.67

Question 12

Assuming all else the same,the future value of an annuity due will be _____________ that of an ordinary annuity.

A)Greater than
B)Equal to
C)Less than
D)Incomparable to

Question 13

Assume that an individual puts $10,000 into a savings account that pays 3% interest compounded monthly with the intent to withdraw the balance in 5 years to buy a car.If he does not make any further deposits over this period,how much will the individual be able to put towards his purchase?

A)$10,125.63
B)$11,592.74
C)$11,616.17
D)$58,916.03

Question 14

Suppose that a tenant is interested in renting out a two-bedroom apartment for $1000 a month for the next year.While the tenant requires rent to be paid at the beginning of the month,he will not be depositing the rental check into a local savings account until the end of each month.If the annual interest that the tenant can earn on this account is 5% and interest is compounded monthly,how much will the tenant have in his savings account at the end of the year?

A)$12,278.86
B)$12,613.94
C)$13,330.02
D)$15,917.13

Question 15

Suppose an investor is interested in purchasing the following income producing property at a current market price of $450,000.The prospective buyer has estimated the expected cash flows over the next four years to be as follows: Year 1 = $40,000,Year 2 = $45,000,Year 3 = $50,000,Year 4 = $55,000.Assuming that the required rate of return is 12% and the estimated proceeds from selling the property at the end of year four is $500,000,what is the NPV of the project?

A)$8,829.96
B)$9,889.56
C)$428,113.65
D)$459,889.56

Question 16

Since investors prefer to have money now rather than later,money received next week,instead of today,is not worth as much to those receiving it.Therefore an adjustment to the prospective cash flows is required.This process is referred to as:

A)compounding
B)discounting
C)amortizing
D)hedging

Question 17

With compound interest,the investor earns interest on the principal amount invested plus interest on accumulated interest.Which of the following compounding frequencies would yield the investor the greatest ending balance assuming all else is equal?

A)Daily
B)Monthly
C)Quarterly
D)Annually

Question 18

Assume that a piece of land is currently value at $50,000.If this piece of land is expected to appreciate at an annual rate of 5% per year for the next 20 years,how much will the land be worth 20 years from now?

A)$100,898.99
B)$112,633.09
C)$123,860.81
D)$132,664.89

Question 19

Assuming that an investor requires a 10% annual yield over the next 12 years,how much would she be willing to pay for the right to receive $20,000 at the end of year 12?

A)$6,053.91
B)$6,372.62
C)$62,768.57
D)$136,273.84

Question 20

The purchase price of a piece of property is $70,000.After analysis of the cash flows,expected sales price,and expected yield,the investor decides the deal has a present value (PV)of $80,000.What is the net present value (NPV),and should the investor take the deal?

A)$10,000;Yes
B)$10,000;No
C)-$10,000;Yes
D)-$10,000;No

Question 21

An investor just purchased an office building for $100,000.He knows for certain that he can sell the building for $110,000 in 5 years.Approximately how much does he need to charge in annual rent in order to achieve a 15% annual return on the deal?

A)$2,500
B)$8,000
C)$13,500
D)$20,500