NOI and Cap Rate: Why not NOI * (1+g)

CFA Level II Alternative Investments
#1

Hi,

my question is on Example 15 on page 34 in Reading 39 of the CFAI material. It is about the valuation of a property that has a NOI of 100,000 which is expected to increase at 2% (g) per year. The discount rate is 12% ®.

The solution is:

NOI / (r-g) = 100,000 / (0.12-0.02) = 1,000,000

Shouldn’t we also take account of the growth rate in the nominator just like in the Gordon Growth model? That is:

NOI * (1+g) / (r-g) = 100,000 * (1.02) / (0.12-0.02) = 1,020,000

Thanks.

#2

Noticed that as well on the CFAI 16 mock they use NOI / cap rate. Was wondering the same thing.