Which test evaluates whether the expected income from the proposed use justifies the investment required?

Which test evaluates whether the expected income from the proposed use justifies the investment required?

• A. Maximally productive use
• B. Physically possible use
• C. Legally permissible use
• D. Financially feasible use

Answer: (D)

The idea being tested is whether the use is financially feasible. This test asks if the expected income from the proposed use will justify the investment required to acquire, develop, and operate the property. It looks at projected cash flows—revenues minus operating expenses, financing costs, taxes—and asks whether those cash flows provide a satisfactory return on the capital invested. If the expected returns meet or exceed the investor’s requirements and justify the upfront and ongoing costs, the use is financially feasible. If not, even if the use is physically possible and legally permissible, it wouldn’t be considered viable.

The idea being tested is whether the use is financially feasible. This test asks if the expected income from the proposed use will justify the investment required to acquire, develop, and operate the property. It looks at projected cash flows—revenues minus operating expenses, financing costs, taxes—and asks whether those cash flows provide a satisfactory return on the capital invested. If the expected returns meet or exceed the investor’s requirements and justify the upfront and ongoing costs, the use is financially feasible. If not, even if the use is physically possible and legally permissible, it wouldn’t be considered viable.