76. 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?
Answer: A
The property's market value is $100,000.
To determine the market value of the property, divide the operating income by the desired rate of return. In this case, $12,000 divided by 0.12 equals $100,000.
A) $100,000
This option is correct because it accurately reflects the calculation of market value based on the formula: Market Value = Operating Income / Rate of Return. Thus, $12,000 / 0.12 = $100,000.
B) $110,000
This option is incorrect as it does not align with the mathematical calculation required to find the market value. If we were to use $110,000 as the market value, the implied rate of return would be approximately 10.91%, which does not match the desired rate of return of 12%.
C) $144,000
This option is also incorrect. If the market value were $144,000, the implied rate of return would be 8.33% when calculated using the formula Operating Income / Market Value ($12,000 / $144,000), which is significantly lower than the desired rate of return of 12%.
D) $120,000
This option is not correct as it leads to an implied rate of return of 10%. Using $120,000 as the market value would mean that the investor is accepting a return lower than the desired 12%, thus failing to meet their investment criteria.
Conclusion
The correct answer is $100,000, as it precisely meets the investor's desired return of 12% when calculated from the provided operating income. All other options fail to satisfy the rate of return requirement, demonstrating a misunderstanding of the relationship between income and market value in real estate investment.