Michael Masury has an opportunity to buy a commercial property. Rents from the property will be $24,000 and he expects them to increase at a rate of 3% per year annually. His required rate of return on this investment is 12%. At what price would Michael be indifferent to buying or not buying the investment? Round off to the nearest $1.

Question

Quizplus · Accepted Answer

The price at which Michael would be indifferent is the present value of a growing perpetuity. The formula is PV = D / (r - g), where D is the initial rent ($24,000), r is the required rate of return (12% or 0.12), and g is the growth rate (3% or 0.03). Plugging in the values, PV = $24,000 / (0.12 - 0.03) = $266,667.

Michael Masury Has an Opportunity to Buy a Commercial Property