Estimated Property Value Calculation

B

To estimate the market value of an income-producing property, you can use the capitalization rate (cap rate) approach, which is commonly used in real estate valuation. The formula to calculate the estimated property value using the cap rate approach is:

Property Value = Net Operating Income / Cap Rate

Given information: Net Operating Income (NOI) = $956,000 Taxes = $143,400 Cap Rate = 16% Inflation Rate = 3%

Step 1: Adjust Net Operating Income for Taxes Since the NOI provided does not account for taxes, you need to adjust it. The adjusted net operating income (ANOI) is calculated by subtracting the taxes from the NOI:

ANOI = NOI - Taxes ANOI = $956,000 - $143,400 ANOI = $812,600

Step 2: Adjust Net Operating Income for Inflation To account for the impact of inflation on future cash flows, you need to adjust the ANOI using the inflation rate. This adjustment estimates the future value of the ANOI:

Future ANOI = ANOI * (1 + Inflation Rate) Future ANOI = $812,600 * (1 + 0.03) Future ANOI = $836,878

Step 3: Calculate Property Value Now, you can calculate the estimated property value using the adjusted net operating income and the cap rate:

Property Value = Future ANOI / Cap Rate Property Value = $836,878 / 0.16 Property Value = $5,230,487.5

Based on the calculations, the estimated property value is approximately $5,230,487.5.

None of the provided answer choices matches the calculated value exactly. However, the closest option is A. $5,078,750.