Question

Barbra purchased a piece of real estate last year for $85,000. The real estate is now worth $102,000. If Barbra needs to have a total return of 25 percent during the year, then what is the dollar amount of income that she needs to have to reach her objective

Answer 1

Answer:

The multiple choices are:

$4,250  

$5,250

$3,750

$4,750

The correct answer is $4,250,the first option

Explanation:

The point is that Barbra expect the piece of real estate to appreciate in value by 25% which gives a value of $85,000*125%=$106,250

However,the present worth is now $102,000,hence the increase beyond the $102,000 is the income receivable from the real estate in form of rental income,which is given by $4,250($106,250-$102,000)

The first option is the correct answer

Answer 2

Answer:

$4,250

Explanation:

Current return = $102,000 - $85,000 = $17,500

Current rate of return = $17,500/$85,000 = 0.2, or 20%

Additional required rate of return = 25% - 20% = 5%

Dollar amount of income = 5% * $85,000 = $4,250

Therefore, Barbra needs $4,250 to reach her objective.

Check:

Total return = $17,500 + $4,250 = $21,250

Total required rate of return = $21,250/$85,000 = 0.25, or 25%.