A rental property is providing an acceptable market rate of return of 13 percent. You expect next year's rent to be $1 million and that rent is expected to grow at 3 percent per year forever. What is the current value of the property?
A)$7.7 million
B)$10.0 million
C)$33.3 million
D)$50.0 million

Question

Quizplus · Accepted Answer

Using the perpetuity formula, the current value of the property is:

PV = Rent / (Market Rate of Return - Expected Growth Rate)
PV = $1 million / (0.13 - 0.03)
PV = $1 million / 0.1
PV = $10 million

A Rental Property Is Providing an Acceptable Market Rate of Return