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 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 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 calculate the present value of this investment opportunity, we need to use the formula for the present value of an annuity:

PV = PMT x [(1 - (1 / (1 + r)n)) / r]

where PV is the present value, PMT is the monthly payment ($800), r is the monthly interest rate (3% / 12 = 0.0025), and n is the number of payments (12).

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

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

Suppose You Have Found a Tenant Who Wishes to Rent