Chapter 5

1. The process of determining the present value of an income stream by applying appropriate time value of concept is known as ________.
A. Compounding
B. Discounting
C. Future value
D. Present Value
Answer is B: Discounting

2. Which of the following is not true about a cash flow statement:
A. Potential gross income is the total amount of income that the property would generate if fully occupied for the entire year.
B. Operating expenses represents the amount of expenditures necessary to maintain the subject property.
C. Debt service represents the amount of money necessary each year to service the property debt.
D. Net operating income is calculated as the difference between potential gross income and debt service.

Answer is D: Net operating income is the difference between effective gross income and operating expenses.

3. Which of the following is not a step in calculating a future value of annuity:
A. Discount the cash flows
B. Compound the lump sum present value into its future value lump sum equivalent.
C. Calculate the lump sum present value of the annuity.
D. Both B & C

Answer is A. Discounting cash flows is not a step in calculating the future value of annuity.

1. A Mortgagor is a real estate lender. T/F
False: A Mortgagee is the real estate lender.

2. Net Present Value is the discounted value of an income-producing asset considering both cash inflows to the asset owner and cash outflows from the asset owner. T/F
Answer: True

3. The Internal Rate of Return is a specific type of income stream characterized by equal periodic payments over its life. T/F
Answer: False- This is the definition of annuity.

4. The MIRR is calculated by compounding all cash inflows to the terminal year and discounting all cash outflows to the beginning year. T/F
Answer: True

5. Amortization is the systematic reduction of debt through a series of scheduled principal repayments that lead eventually to the complete extinction of the loan. T/F
Answer: True