Question

Given the following information, calculate the estimated terminal value of the property at the end of its holding period: cap rate: 9%; estimated holding period: five years; NOI for year 5: $100,500; NOI for year 6: $102,000.

A. $1,113,333
B. $1,116,667
C. $1,133,333
D. $1,166,667

Answer 1

The estimated terminal value of the property at the end of its holding period is calculated by dividing the NOI for Year 6 ($102,000) by the cap rate (9%), giving us a terminal value of $1,133,333.

Step-by-step explanation:

To calculate the estimated terminal value of the property at the end of its holding period, we use the Net Operating Income (NOI) for year 6, since the terminal value is estimated based on the income that the property will generate in the future, beyond the holding period.

The formula for the terminal value (TV) is: TV = NOI for the first year beyond the holding period / Capitalization rate (cap rate).

Using the given data:

• NOI for Year 6: $102,000
• Cap rate: 9%

TV = $102,000 / 0.09 = $1,133,333.

Therefore, the estimated terminal value of the property at the end of its holding period is $1,133,333, which corresponds to option C. This is calculated by dividing the NOI for year 6 by the given cap rate of 9%.

Answer 2

The terminal value of the property at the end of a five-year holding period is calculated by dividing the NOI for year 6, which is $102,000, by the cap rate of 9%. The result is $1,133,333, which means answer C is correct.

Step-by-step explanation:

The terminal value of a property is typically calculated using a cap rate and the property's Net Operating Income (NOI) at the point of sale. For this student's question, we must calculate the value at the end of year 5 because it's the end of the estimated holding period.

The formula for calculating terminal value is:

Terminal Value = NOI of next year / Cap Rate

In this case, the NOI for year 6 is given as $102,000 and the cap rate is 9% (expressed as 0.09 in decimal form). Thus, the calculation would be:

Terminal Value = $102,000 / 0.09

Let's do the math:

Terminal Value = $102,000 / 0.09
Terminal Value = $1,133,333.33

Therefore, the correct answer to the student's question is C. $1,133,333.