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CFA Level I · CFA Level I Exam · Real Estate and Infrastructure

A property has first-year net operating income of $900,000. The market capitalization rate is 8.0% and NOI is expected to be stable. The value of the property using direct capitalization is closest to:

The value is about $11.25 million. Under direct capitalization, value equals net operating income divided by the capitalization rate, so $900,000 divided by 0.08 gives $11,250,000. Multiplying income by the rate instead of dividing is the common error and produces a far smaller number.

  1. A$7.20 million
  2. B$11.25 millionCorrect
  3. C$72.00 million

Explanation

Value = NOI / cap rate = 900,000 / 0.08 = $11,250,000. Multiplying NOI by the rate gives $72,000 (scaled incorrectly to $7.2 million), which is a wrong operation.

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