An investor estimates an income property's operating income at $12,000. If the desired rate of return is 12%, what is the property's market value?

Rationale

$100,000

To determine the market value of an income property based on its operating income and desired rate of return, one can use the formula: Market Value = Operating Income / Rate of Return. In this case, dividing the estimated operating income of $12,000 by the desired rate of return of 12% (or 0.12) yields a market value of $100,000.

A ($100,000) CORRECT

This choice is correct because when the operating income of $12,000 is divided by the desired rate of return (0.12), the calculation is $12,000 / 0.12 = $100,000. This accurately reflects the property's market value based on the investor's expectations.

B ($110,000) YOUR ANSWER

This choice is incorrect as it implies a higher market value than what is calculated from the given operating income and rate of return. Using the same formula, $110,000 would suggest an operating income of $13,200, which does not align with the provided operating income of $12,000.

C ($144,000) YOUR ANSWER

This choice is also incorrect. A market value of $144,000 would require an operating income of $17,280, calculated as $144,000 multiplied by 0.12, thereby exceeding the stated operating income of $12,000.

D ($120,000) YOUR ANSWER

This choice is misleading as it suggests a market value that does not match the operating income when applying the desired rate of return. A market value of $120,000 would indicate an operating income of $14,400, which again is not consistent with the estimated income of $12,000.

Conclusion

The market value of an income property can be accurately calculated using the operating income and desired rate of return. In this instance, the correct market value derived from the operating income of $12,000 and a 12% return is $100,000. The other options misrepresent this value based on incorrect income estimates, affirming the importance of applying the formula correctly to determine true property worth.

An investor estimates an income property's operating income at $12,000. If the desired rate of return is 12%, what is the property's market value?

$100,000

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