Chapter 10 Flashcards
1
Q
Direct Capitalization Method
A
Value = Net Operating Income/Cap Rate
2
Q
Cap Rate
A
Cap Rate = Net Operating Income/Value
Required Rate of Return - Growth Rate
3
Q
The GIGO Method
A
GIGO stands for Garbage In, Garbage Out and indicates that if the real estate valuation is based off of unrealistic cash flow and discount rate assumptions (due to intentional misleading, excessive laziness, etc.) then it too will be unrealistic or biased.
4
Q
NPV Decision Rule
A
Based on the wealth maximization principle and suggests that by
using and maximizing the net present value of a given investment, the investor is maximizing their wealth and by not doing so, they are leaving money on the table.
5
Q
Hurdle Rate Decision Rule
A
- Maximize the difference between the project’s expected IRR and the required return.
- Never do a deal with an expected IRR less than the required return.
