Suppose you own a house that you are renting out to a group of college students for the 10 month academic year. You are charging $1000 per month in rent. You will collect the first rent payment today and then on the 1ˢᵗ of the month each month thereafter. What is the value of this investment opportunity to you today if you could reinvest your income at an annualized rate of 6%?
A) $9,677.77
B) $9,730.41
C) $9,779.06
D) $11,677.03

Question

Quizplus · Accepted Answer

The total rent earned over 10 months would be:
$1000/month x 10 months = $10,000

To calculate the present value of this investment, we need to discount the future cash flows at a rate of 6%. Using the formula:

PV = CF / (1 + r)^n

where PV is the present value, CF is the cash flow, r is the rate, and n is the number of periods.

PV = $10,000 / (1 + 0.06/12)^1 + $10,000 / (1 + 0.06/12)^2 + ... + $10,000 / (1 + 0.06/12)^10

PV = $9,779.06

Therefore, the option C is the best choice.

Suppose You Own a House That You Are Renting Out