Multiple Choice Questions

[QUESTION]
1. Risk is the possibility that actual outcomes will vary from what was expected when the
asset was purchased. If investors require a higher rate of return for undertaking more risk, the
underlying assumption is that investors are:
A. risk neutral
B. risk averse
C. risk taking
D. hedging risk
Ans: B
Difficulty: Basic
Learning Objective: 3
[QUESTION]
2. Since investors prefer to have money now rather than later, money received next week,
instead of today, is not worth as much to those receiving it, assuming the magnitude of the
cash flow in each period is the same. Therefore an adjustment to the prospective cash flows is
required. This process is referred to as:
A. compounding
B. discounting
C. amortizing
D. hedging
Ans: B
Difficulty: Basic
Learning Objective: 1
[QUESTION]
3. When discussing time-value-of-money it is necessary to understand some key terminology.
Which of the following terms refers to a fixed amount of money paid or received at the end of
every period (i.e. a series of equal lump sums)?
A. Future value
B. Present value
C. Ordinary annuity
D. Annuity due
Ans: C
Difficulty: Basic
Learning Objective: 1
[QUESTION]
4. With compound interest, the investor earns interest on the principal amount invested plus
interest on accumulated interest. Which of the following compounding frequencies would
yield the investor the greatest ending balance assuming all else is equal?

A. Daily
B. Monthly
C. Quarterly
D. Annually
Ans: A
Difficulty: Intermediate
Learning Objective: 2
[QUESTION]
5. Assuming all else the same, the ___________ of an annuity due will be _____________
that of an ordinary annuity.
A. future value; greater than
B. present value; equal to
C. future value; less than
D. present value; less than
Ans: A
Difficulty: Intermediate Learning Objective: 2
[QUESTION]
6. The internal rate of return (IRR) and the net present value (NPV) are tools that are widely
used in real estate investment and finance decision making. An investor would most likely
pursue an investment if which of the following circumstances was true?
A. The going-in IRR exceeds the investors required rate of return
B. The going-in IRR is less than the investors required rate of return
C. The going-in IRR exceeds the NPV
D. The going-in IRR is less than the NPV
Ans: A
Difficulty: Intermediate
Learning Objective: 4
[QUESTION]
7. The rate that is used to discount expected future cash flows can be thought of as the return
the investor is forgoing on an alternative investment of equal risk. In this framework, the
discount rate is being thought of as which of the following?
A. Net present value
B. Opportunity cost
C. Closing cost
D. Future value
Ans: B
Difficulty: Basic
Learning Objective: 3

[QUESTION]
8. The Real Estate Research Corporation (RERC) regularly surveys a sample of institutional
investors and managers in order to gain insight into the required returns and risk adjustments
used by industry professionals when making real estate acquisitions. Most of the properties
that RERC examines are large, relatively new, located in major metropolitan areas and fully
or substantially leased. These classifications of properties are commonly referred to as:
A. investment grade properties
B. speculative grade properties
C. net-lease properties
D. industrial properties
Ans: A
Difficulty: Basic
Learning Objective: 3
[QUESTION]
9. Uncertainty of cash flows can vary significantly across property types. Which of the
following property types is often considered to have the most uncertain expected cash flows?
A. Multifamily
B. Industrial
C. Office
D. Hospitality
Ans: D
Difficulty: Intermediate
Learning Objective: 3
[QUESTION]
10. You have just had a tenant sign a lease contract that guarantees you payments of $100,000
at the end of each year for the next five years. If you wish to determine the present value of
these future cash flows (i.e. the value of this cash flow stream to you today), you would use
which of the following time value of money processes?
A. Compounding
B. Discounting
C. Amortizing
D. Aggregating
Ans: B
Difficulty: Basic
Learning Objective: 1

Multiple Choice Problems

[QUESTION]
11. Suppose an investor deposits $2500 in an interest-bearing account at her local bank. The
account pays 2.5% interest compounded annually. If the investor plans on withdrawing the
original principal plus accumulated interest at the end of 7 years, what is the total amount that
she should expect to receive assuming interest rates do not change?
A. $2,971.71
B. $2,974.89
C. $3,532.43
D. $11,920.93
Ans: A
Difficulty: Basic
Learning Objective: 2
[QUESTION]
12. Suppose that a landlord is interested in renting out a two-bedroom apartment for $1000 a
month for the next year. The landlord requires rent to be paid at the beginning of the month, at
which point he will deposit the rental check into a local savings account. If the annual interest
that the tenant can earn on this account is 5% and interest is compounded monthly, how much
will the tenant have in his savings account at the end of the year?
A. $12,278.86
B. $12,330.01
C. $13,330.02
D. $15,917.13
Ans: B
Difficulty: Intermediate
Learning Objective: 2
[QUESTION]
13. An investor agreed to sell a warehouse 5 years from now to the tenant who currently rents
the space. The tenant will continue to pay $20,000 rent at the end of each year including year
five in which he will purchase the building for an additional $150,000. Assuming the
investor's required rate of return is 10%, how much is this deal presently worth to the investor
who was willing to sell?
A. $168,953.93
B. $241, 451.07
C. $363,678.50
D. $1,032,475.67
Ans: A
Difficulty: Intermediate Learning Objective: 2

[QUESTION]
14. Assuming that an investor requires a 10% annual yield over the next 12 years, how much
would she be willing to pay for the right to receive $20,000 at the end of year 12?
A. $6,053.91
B. $6,372.62
C. $62,768.57
D. $136,273.84
Ans: B
Difficulty: Basic
Learning Objective: 2
[QUESTION]
15. Assume that an individual puts $10,000 into a savings account that pays 3% interest, with
interest being compounded monthly. The individual plans to withdraw the balance in 5 years
to buy a car. If he does not make any further deposits over this period, how much will the
individual be able to put towards his purchase?
A. $10,125.63
B. $11,592.74
C. $11,616.17
D. $58,916.03
Ans: C
Difficulty: Intermediate
Learning Objective: 2
[QUESTION]
16. The purchase price of an income producing property today is $570,000. After analysis of
the expected future cash flows, expected sales price, and expected yield, the investor
determines that the future cash flows have a present value (PV) of $580,000. Taking into
consideration the price of the property today, what is the net present value (NPV) of this
investment opportunity, and should the investor take the deal?
A. $10,000; Yes
B. $10,000; No
C. -$10,000; Yes
D. -$10,000; No
Ans: A
Difficulty: Basic Learning Objective: 5
[QUESTION]
17. Suppose an investor is interested in purchasing the following income producing property
at a current market price of $450,000. The prospective buyer has estimated the expected cash
flows over the next four years to be as follows: Year 1 = $40,000, Year 2 =

$45,000, Year 3 = $50,000, Year 4 = $55,000. Assuming that the required rate of return is
12% and the estimated proceeds from selling the property at the end of year four is $500,000,
what is the NPV of the project?
A. $8,829.96
B. $9,889.56
C. $428,113.65
D. $459,889.56
Ans: B
Difficulty: Intermediate
Learning Objective: 5
[QUESTION]
18. Assume that an industrial building can be purchased for $1,500,000 today, is expected to
yield cash flows of $80,000 for each of the next five years (with the cash flows occurring at
the end of each year), and can be sold at the end of the fifth year for $1,625,000. Calculate the
internal rate of return (IRR) for this transaction.
A. 3.14%
B. 6.78%
C. 9.20%
D. 10.37%
Ans: B
Difficulty: Basic
Learning Objective: 4
[QUESTION]
19. Assume that a piece of land is currently valued at $50,000. If this piece of land is expected
to appreciate at an annual rate of 5% per year for the next 20 years, how much will the land be
worth 20 years from now?
A. $100,898.99
B. $112,633.09
C. $123,860.81
D. $132,664.89
Ans: D
Difficulty: Basic
Learning Objective: 2
[QUESTION]
20. An investor originally paid $22,000 for a vacant lot 12 years ago. If the investor is able to
sell the lot today for $62,000, what would his annual rate of return be on this investment
(rounded to the nearest percent)?
A. 5%
B. 7%
C. 9%

D. 11%
Ans: C
Difficulty: Basic
Learning Objective: 4
[QUESTION]
21. An investor just purchased an office building for $100,000. He knows for certain that he
can sell the building for $110,000 in 5 years. Approximately how much does he need to
charge in annual rent in order to achieve a 15% annual return on the deal (rounded to the
nearest hundred dollars)?
A. $2,500
B. $8,000
C. $13,500
D. $20,500
Ans: C
Difficulty: Advanced
Learning Objective: 2
[QUESTION]
22. Suppose a bank decides to make a mortgage loan to an individual so that they may
purchase a home. The homeowner will pay the bank $1500 per month in mortgage payments
for the next 30 years. The bank will collect the mortgage payments at the end of the month.
What is this promised stream of cash flows worth to the bank today if they could reinvest the
monthly income at an annualized rate of 5% for the entire investment horizon?
A. $23,058.68
B. $99,658.27
C. $279,422.43
D. $1,248,387.95
Ans: C
Difficulty: Intermediate
Learning Objective: 2
[QUESTION]
23. Suppose you have found a tenant who wishes to rent out your vacation home for the next
twelve months. You are charging $800 per month in rent. You will collect the first rent
payment today and then on the 1st of the month each month thereafter. What is the value of
this investment opportunity to you today if you could reinvest your income at an annual rate
of 3% with interest compounded on a monthly basis?
A. $7,963.20
B. $8,202.10 C. $9,445.80
D. $9,469.42
Ans: D

Difficulty: Intermediate
Learning Objective: 2
[QUESTION]
24. Suppose that a property can generate cash flows of $10,000 per year for eight years and
can sell for $80,000 at the end of the investment period. Assuming a discount rate of 10%,
what is the present value of this property (Assume end of period cash flows in your
calculation)?
A. $117,320
B. $160,000
C. $133,349
D. $90,670
Ans: D
Difficulty: Basic
Learning Objective: 2
[QUESTION]
25. Suppose that an industrial building can be purchased today for $2,500,000. If it is
expected to produce cash flows of $180,000 for each of the next five years (assume CFs are
received at the end of each year) and can be sold at the end of the fifth year for $2,800,000,
what is the internal rate of return (IRR) on this investment?
A. 0.09%
B. 4.57%
C. 9.20%
D. 10.37%
Ans: C
Difficulty: Basic
Learning Objective: 4
[QUESTION]
26. Upon starting his first job after graduation, Jon has completed the necessary paperwork to
set up direct deposit of his paycheck into his savings account. After taxes, medical benefits,
and retirement account contributions have been taken out of Johns gross salary, he is left
with a direct deposit of $4000 at the end of each month. If John started with no other savings
in his account, how much will John have in his savings account at the end of 12 months if he
is able to earn an annual interest rate of 3%, with interest being compounded monthly?
A. $48, 665.53
B. $48,787.19
C. $56,768.12
D. $58,471.16
Ans: A
Difficulty: Intermediate

Learning Objective: 2
[QUESTION]
27. Suppose you are starting a Ph.D. program with only $1,000 in your savings account. The
university has agreed to waive your tuition, cover all of your living expenses, and pay you an
additional stipend of $2,000 at the beginning of each month, as long as you teach one course
per semester over the course of five years. If your savings account is able to earn 5.5% per
year for the five years that you will be in this program, how much will you have accumulated
in your savings account by the end of the program if interest is compounded on a monthly
basis?
A. $136,445.94
B. $137,708.75
C. $139, 077.35
D. $139,708.76
Ans: D
Difficulty: Intermediate
Learning Objective: 2
[QUESTION]
28. Suppose your personal financial goal is to retire with a million dollars in your savings
account. How much must you deposit monthly in an account paying 5% a year (with interest
being compounded monthly and your deposits occurring at the end of the month), to
accumulate $1,000,000 by your 65th birthday if you begin your deposits on your 22nd
birthday? (Note: Assume that you started with no savings in the account prior to your first
deposit at age 22 and you do not make a deposit on your 65th birthday)
A. $552.13
B. $701.90
C. $21,282.95
D. $186,354.63
Ans: A
Difficulty: Advanced
Learning Objective: 2
[QUESTION]
29. A property owner has set up a contract in which he agrees to sell a warehouse 5 years
from now to the tenant who currently leases the space. The tenant has agreed to continue to
pay $20,000 in rent at the end of each year, including year five, at which time he will
purchase the building for an additional $1,500,000. Assuming the required rate of return on a
similar investment is 10% (annual), how much is this deal presently worth to the original
owner of the property?
A. $1,007,197.20
B. $1,014,779.29

C. $2,281,452.80
D. $2,293,663.00
Ans: A
Difficulty: Intermediate
Learning Objective: 2
[QUESTION]
30. Suppose you own a house that you are renting out to a group of college students for the 10
month academic year. You are charging $1000 per month in rent. You will collect the first
rent payment today and then on the 1st of the month each month thereafter. What is the value
of this investment opportunity to you today if you could reinvest your income at a rate of 6%?
A. $9,677.77
B. $9,730.41
C. $9,779.06
D. $11,677.03
Ans: C
Difficulty: Advanced
Learning Objective: 2
[QUESTION]
31. Suppose an investor is interested in purchasing the following income producing property
at a current market price of $490,000. The prospective buyer has estimated the expected cash
flows over the next four years to be as follows: Year 1 = $48,000, Year 2 = $49,440, Year 3 =
$50,923, Year 4 = $52,451. Assuming that the required rate of return is 14% and the
estimated proceeds from selling the property at the end of year four is $560,000, what is the
NPV of the project?
A. -$12,860.53
B. $145,574.52
C. $331,564.96
D. $477,139.47
Ans: A
Difficulty: Intermediate
Learning Objective: 5