Question

A prospect is considering the purchase of an income property which has an operating statement showing the deductions subtracted from a gross income of $94,500 to arrive at the net income. The deductions amount to 60% of the gross income. If the prospect wants a 12% return on the purchase price of any investment he makes, what should he pay for the property?

A. $69,750
B. $77,000
C. $85,500
D. $94,500

Answer 1

To determine the price the prospect should pay for the property, we need to calculate the net income and apply a 12% return rate. The prospect should pay $315,000 for the property.

Step-by-step explanation:

To calculate the price the prospect should pay for the property, we need to determine the net income. We know that the deductions amount to 60% of the gross income of $94,500. So, the deductions can be calculated as:

Deductions = 0.60 * $94,500 = $56,700

The net income is the gross income minus the deductions:

Net income = $94,500 - $56,700 = $37,800

To find the purchase price, we need to calculate 12% of the net income:

Purchase price = (Net income / 0.12) = $37,800 / 0.12 = $315,000

Therefore, the prospect should pay $315,000 for the property.