Genaro needs to capture a return of 40 percent for his one-year investment in a property. He believes that he can sell the property at the end of the year for $150,000 and that the property will provide him with rental income of $25,000. What is the maximum amount that Genaro should be willing to pay for the property?
A) $112,500
B) $125,000
C) $137,500
D) $150,000

Question

Quizplus · Accepted Answer

To calculate the maximum amount that Genaro should be willing to pay for the property, we need to use the formula for the required rate of return:

Required rate of return = (Ending Value - Beginning Value + Income) / Beginning Value

Plugging in the numbers, we get:

40% = (150,000 - Beginning Value + 25,000) / Beginning Value

Solving for Beginning Value, we get:

Beginning Value = $107,143

So, Genaro should not pay more than $107,143 for the property. However, since he believes that he can sell the property for $150,000 at the end of the year, he may be willing to pay more than that. The maximum amount he should be willing to pay is:

Maximum Amount = Beginning Value + Income = $107,143 + $25,000 = $132,143

Therefore, the best choice is B.

Genaro Needs to Capture a Return of 40 Percent for His