chapter14

For monthly compounding, the periodic interest rate (I) should be:

A. Annual rate × 12
B. Annual rate ÷ 12
C. Annual rate unchanged
D. Always 1%

B. Annual rate ÷ 12

when computing IRR, we place the acquisition price…

-# in CF0

The higher the required return (discount rate),

the lower the present value…willing to pay LESS now for the investment

If NPV is NEGATIVE then the IRR will be

BELOW the discount rate, both indicating that the investment is ‘not so good’

•If the IRR of an investment opportunity EXCEEDS the investors required rate of return (Discount Rate), then the investment should be ___________.

undertaken

•If the IRR is LESS than the investor’s required rate of return (Discount Rate), the investment should be forgone, and other opportunity ________.

pursed

If NPV is POSITIVE  then the IRR will be

ABOVE the discount rate, both indicating the investment is ‘good’

The lower the required return (discount rate),

the higher the present value…willing to pay MORE now for the investment

Annuity Due -

Beginning

Ordinary Annuity -

End

A fixed mortgage payment is an example of which concept?

A. Lump sum
B. Reversion
C. Annuity
D. Discount rate

C. Annuity

The future value received at the end of the holding period is also known as:

A. Net present value
B. Reversion
C. Sunk cost
D. Opportunity cost

B. Reversion

The opportunity cost represents:

A. Taxes due after investment
B. Lost benefits of the alternative not chosen
C. Risk added to the investment
D. Income that cannot be discounted

B. Lost benefits of the alternative not chosen

Investment value is defined as:

A. The tax basis of the asset
B. Maximum price an investor is willing to pay
C. Market value only
D. Book value after depreciation

B. Maximum price an investor is willing to pay

If NPV = 0, then the IRR is:

A. Less than the discount rate
B. Equal to the discount rate
C. Not calculable
D. Higher than the discount rate

B. Equal to the discount rate

Higher-quality, safer real estate investments generally:

A. Have higher expected returns
B. Have lower required returns
C. Are valued only by IRR
D. Require no discounting

B. Have lower required returns

Riskier real estate investments such as development generally require:

A. Lower expected returns
B. No discount rate
C. Higher expected returns
D. Lower cash flows

C. Higher expected returns

IRR is the rate that makes NPV equal to:

A. Cash flow
B. Discount rate
C. One
D. Zero

D. Zero

IRR represents the:

A. Total tax amount
B. Annualized expected return on an investment
C. Future value of payments
D. Risk-free rate

B. Annualized expected return on an investment

If IRR exceeds the investor’s required return, the investment should be:

A. Rejected
B. Ignored
C. Accepted
D. Deferred

C. Accepted

If NPV is positive, IRR will be:

A. Below the discount rate
B. Above the discount rate
C. Equal to 5%
D. Impossible to determine

B. Above the discount rate

Which is true about discount rates and present value?

A. A higher required return increases present value
B. A lower required return increases present value
C. Discount rates never affect value
D. Present value rises with increasing risk

B. A lower required return increases present value

risk free rate is usually

10 year treasury rate

lower required return?

higher present value

higher required return?

lower present value