Suppose that you are attempting to value an income-producing property using the direct capitalization approach. Using data from comparable properties, you have determined the overall capitalization rate to be 7.5%. If the projected first-year net operating income (NOI) for the subject property is $135,500, what is the indicated value of the subject using direct capitalization

$1,806,666.67

Explanation:

The computation of the indicated value of the subject using direct capitalization is shown below:

= Annual Net operating income ÷ Capitalization rate

= $135,500 ÷ 7.5%

= $1,806,666.67

By dividing the annual net operating income with the capitalization rate we can get the indicated value and the same is applied above

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