Question

Michael Masury has an opportunity to buy a commercial property. Rents from the property will be​ $24,000 and he expects them to increase at a rate of​ 3% per year annually. His required rate of return on this investment is​ 12%. At what price would Michael be indifferent to buying or not buying the​ investment? Round off to the nearest​ $1.

Answer 1

The Complete question is as follows

Michael Masury has an opportunity to buy a commercial property. Rents from the property will be $24,000 and he expects them to increase at a rate of 3% per year annually. His required rate of return on this investment is 12%. At what price would Michael be indifferent to buying or not buying the investment? Round off to the nearest $1. A) $171,429 B) $266,667 C) $800,000 D) $240,000

The Answer is B.

Step-by-step explanation:

The property rent is $ 24,000

Required rate of return is 12%

Expected Incremental increase in return is 3%

So our formula develops like this

Rent/required rate of return-expected incremental increase in return

=24,000/(.12-.3

So the point of indifferent will be $ 266,667

Answer 2

$266,667.

Step-by-step explanation:

P / (r-g) = Periodic payment / Interest rate - Growth rate

= 24,000 / (0.12 - 0.03)

= 24,000 / 0.09

= $266,667