Investment Analysis & ROI Flashcards

What does a net present value (NPV) of zero indicate about an investment?

Answer: The internal rate of return equals the discount rate used

At NPV of zero the investment earns exactly the required rate of return, which is the IRR.

The internal rate of return (IRR) is best defined as the discount rate at which:

Answer: Net present value of all cash flows equals zero

IRR is the rate that makes the present value of inflows equal to the initial investment.

A lender offers a $360,000 loan on a rental appraised at $450,000. What is the loan-to-value ratio?

Answer: 80%

LTV = loan ÷ value = $360,000 ÷ $450,000 = 80%.

A $30,000 amenity upgrade increases annual net income by $7,500. What is the simple payback period?

Answer: 4 years

Payback = cost ÷ annual benefit = $30,000 ÷ $7,500 = 4 years.

A property produces $84,000 in NOI and comparable properties trade at a 7% cap rate. What is its estimated market value?

Answer: $1,200,000

Value = NOI ÷ cap rate = $84,000 ÷ 0.07 = $1,200,000.

A $1,500/month unit sits vacant for one month after move-out and needs $1,000 in make-ready work. What is the total turnover cost?

Answer: $2,500

Turnover cost = $1,500 lost rent + $1,000 make-ready = $2,500.

All else equal, a higher cap rate for a rental property generally signals:

Answer: Higher perceived risk or lower price relative to income

Investors demand higher cap rates for riskier assets, which means paying less per dollar of NOI.