An investor just purchased an office building for $100,000.He knows for certain that he can sell the building for $110,000 in 5 years.Approximately how much does he need to charge in annual rent in order to achieve a 15% annual return on the deal?
A)$2,500
B)$8,000
C)$13,500
D)$20,500

Question

Quizplus · Accepted Answer

The investor's goal is to achieve a 15% annual return on the $100,000 investment. So in 5 years, the total return he expects is 15%* $100,000 *5 = $75,000.

If he sells the building after 5 years for $110,000, he will make a profit of $10,000. So the remaining $75,000 should come from rental income.

Let "R" be the annual rent he needs to charge to achieve his goal. So after 5 years, the total rental income he would have received is 5R.

So, $75,000 = $10,000 + 5R

=> 5R = $65,000

=> R = $13,000

Therefore, the investor needs to charge an annual rent of approximately $13,000 to achieve a 15% annual return on the deal. The closest option is C, $13,500.

An Investor Just Purchased an Office Building for $100,000