ASA Income Approach to Value 1

Question 1

Which capitalization method converts a single year's income into a value estimate by dividing by a rate?

Accepted Answer

Direct capitalization

Answer

Direct capitalization divides a stabilized net operating income by an overall capitalization rate to produce a value estimate.

Question 2

In the income approach, what does NOI stand for?

Accepted Answer

Net Operating Income

Answer

NOI (Net Operating Income) is effective gross income minus operating expenses, excluding debt service.

Question 3

Which of the following is subtracted from potential gross income to arrive at effective gross income?

Accepted Answer

Vacancy and collection loss

Answer

Effective gross income equals potential gross income minus vacancy and collection loss allowances.

Question 4

A property generates NOI of $120,000 and the overall capitalization rate is 6%. What is the indicated value?

Accepted Answer

$2,000,000

Answer

$120,000 ÷ 0.06 = $2,000,000 is the value indicated by direct capitalization.

Question 5

In a discounted cash flow (DCF) analysis, the terminal value is typically estimated using which technique?

Accepted Answer

Applying a terminal cap rate to the final year's projected NOI

Answer

The terminal (reversion) value is most commonly estimated by capitalizing the projected NOI in the year following the holding period.

ASA - American Society of Appraisers Certification Practice Test