Reading 43 page 69 CFA EOC Terminal Value

CFA Level II Alternative Investments
#1

Question 2 on page 69 asks us to value property #1 either using income approach, cost approach or the sales approach.

Answer c states that the terminal value at the end of year 5 in the income approach is $53,632,650, which is the correct answer but it is solved using Year 6 NOI / terminal value. My questions is why don’t we discount Year 5 with the terminal value to get the value of the property since answer C clearly states the terminal value at the end of year 5?

#2

It’s the same principle as dividends growth model for stocks. You don’t use recently paid dividends to calculate stock value, you use the “next” year’s expected dividends, which has grown by g%.

Same here, to calculate terminal value at year 5, you use the “next” year’s NOI, i.e. year 6 NOI.

#3

And i think you might be confusing “terminal value” with “cap rate”

#4

That makes perfect sense! Yes I meant to say cap rate.

You’re the man Kevin !