Price corporation is considering purchasing rental property that provides annual cash ﬂows of $600,000. Rent is expected to increase by 2.5% annually for the foreseeable future. If Mason's
Return requirement is 12.5% and the rental property is listed at $6,500,000 determine if the property
Is over or under valued from Mason's perspective.

Question

Quizplus · Accepted Answer

The listed property is over-valued by $500,000.The present value of the rental property can be calculated as follows:PV = CF / (r - g)where:PV is the present valueCF is the annual cash flowr is the required returng is the growth rateIn this case, the annual cash flow is $600,000, the required return is 12.5%, and the growth rate is 2.5%. Therefore, the present value of the rental property is:PV = $600,000 / (0.125 - 0.025) = $6,000,000Since the listed price of the rental property is $6,500,000, the property is over-valued by $500,000.

Price Corporation Is Considering Purchasing Rental Property That Provides Annual