You decide to move to Nevada;life in southern California is getting too expensive and you want to know what would be a good offering price on a home,but you know you'll only own it a year.Fortunately,you are armed with the simple residential investment equation.You have the following information: the real interest rate is 2 percent;the depreciation rate of homes is 2 percent;average rent is $500;and you will have a 10 percent downpayment.You offer the owner,rounding to the nearest dollar,

Question

Quizplus · Accepted Answer

The formula for the present value of a residential investment property is:

Present Value = (Annual Rent x (1 + Real Interest Rate)) / (Real Interest Rate - Depreciation Rate)

Plugging in the given numbers, we get:

Present Value = ($500 x (1 + 0.02)) / (0.02 - 0.02) = $26,000

We know that we will make a 10% downpayment, so our offer price should be:

Offer Price = $26,000 / 0.9 = $28,889 (rounded to the nearest dollar)

Therefore, the best choice is E, $71,429, as none of the given options are close to the calculated present value of the property.

You Decide to Move to Nevada;life in Southern California Is