Suppose you have found a tenant who wishes to rent out your vacation home for the next twelve months.You are charging $800 per month in rent.You will collect the first rent payment today and then on the 1^st 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 annual rate of 3% with interest compounded on a monthly basis? A)$7,963.20 B)$8,202.10 C)$9,445.80 D)$9,469.42

Question

Quizplus · Accepted Answer

To find the value of this investment opportunity today, we need to calculate the present value of the 12 monthly rental payments discounted at an annual rate of 3% with monthly compounding.

First, we can calculate the monthly interest rate. Since the annual rate is 3% and interest is compounded monthly, the monthly rate is 3% / 12 = 0.0025.

Next, we can use the present value formula to calculate the value today:

PV = C * [1 - (1 + r)^(-n)] / r

Where:
C = monthly rental payment = $800
r = monthly interest rate = 0.0025
n = number of periods = 12

Plugging in the values, we get:

PV = $800 * [1 - (1 + 0.0025)^(-12)] / 0.0025
PV = $9,469.42

Therefore, the value of this investment opportunity to you today is $9,469.42. The answer is D.

Suppose You Have Found a Tenant Who Wishes to Rent