# Problem on Income Approach

Annual rental income: 1,800,000 Annual Operating expenses : 1,200,000 Available mortgage rate: 6% Financing percentage: 90% Required holding period: 5 years Investor tax rate: 25% Based on the income approach, the value of the investment is closest to : A. \$4m B. \$5.455m C. \$6.133m D. \$8.696m I understand how to calculate NOI, but how would you calculate caprate?

Any one figure this one out as yet?

I know the answer is A because I remember this question 15% should be used…give a minute and i’ll figure it out

I think 15% was given. Its from free CFAi sample exam. cfaiscomplex - did you print save all the questions ? Can you please send them to me too… let me know if you can, I’ll tell you my email. Thanks

I have tried several combinations but can’t get it and Sorry thunder…I didn’t print the questions, I just happened to remember this one, amazing though ah!

Where did you guys get 15%?

if A is the answer, and your NOI is 600,000=1,800,000-1,200,000, than 600,000/4,000,000=15%

Alexandrov Wrote: ------------------------------------------------------- > Where did you guys get 15%? as far as I can recall, it was given in the question.

There has to be at least one more variable that is provided with the question; Preferably the Market Value of property, but the market cap rate will do…

Someone in the forum had emailed me the exam question. I guess the question is not complete.

map1 Wrote: ------------------------------------------------------- > if A is the answer, and your NOI is > 600,000=1,800,000-1,200,000, than > 600,000/4,000,000=15% That’s great and all, but the way the question is worded above, you have absolutely no way of coming up with that 15%, not that i am aware of anyway. Also, taxes are deducted from NOI, hence it would be \$450,000, not \$600,000.

I know alex, I’m trying for 2 days now to get the answer and I cannot come up with the 15%.

Alexandrov Wrote: ------------------------------------------------------- > map1 Wrote: > -------------------------------------------------- > ----- > > if A is the answer, and your NOI is > > 600,000=1,800,000-1,200,000, than > > 600,000/4,000,000=15% > > > That’s great and all, but the way the question is > worded above, you have absolutely no way of coming > up with that 15%, not that i am aware of anyway. > > Also, taxes are deducted from NOI, hence it would > be \$450,000, not \$600,000. Incorrect. NOI does not take taxes into consideration (but does take real estate taxes into consideration). It only looks at the annual cash flow and operating expenses.

15% was given in the problem, i remember this question taxes are not included in noi

This is like and IRR/NPV question: how much would I be willing to pay today, for an investment that would produce me EBIT of 600K each of the next 5 years, considering that I have a tax bracket of 25% and a cost of borrowing of 6%, and I borrow 90% of the money that I invest today? If the market cap would have been given that’s easy. If not, I don’t know how to solve it.

once again the cost of capital (15%) was given in the CFAI practice exam question. I distinctly remember this question. stop trying to solve this problem otherwise.