A cash-equivalent sale price is $2,000,000 and annual gross income is $240,000. What is price ÷ annual gross income, rounded to two decimals?
Correct Answer
B) 8.33
2000000÷240000 = 8.33. Common errors: inverting the ratio (income ÷ price) gives 0.12; treating the annual income as monthly gives 100.00; misplacing the decimal in the income gives 83.33.
Why This Is the Correct Answer
Option B is correct because the multiplier is price divided by annual gross income: $2,000,000 ÷ $240,000 = 8.333, which rounds to 8.33. Both figures are annual, so no conversion is needed.
Why the Other Options Are Wrong
Option A: 0.12
Option A, 0.12, comes from inverting the ratio: $240,000 ÷ $2,000,000 = 0.12. That is an income-to-price ratio; the multiplier is $2,000,000 ÷ $240,000 = 8.33.
Option C: 83.33
Option C, 83.33, comes from misplacing the decimal in the income: $2,000,000 ÷ ($240,000 ÷ 10) = $2,000,000 ÷ $24,000 = 83.33. Using the stated $240,000 gives 8.33.
Option D: 100.00
Option D, 100.00, comes from treating the annual income as monthly: $2,000,000 ÷ ($240,000 ÷ 12) = $2,000,000 ÷ $20,000 = 100. The income is annual, so the annual multiplier is $2,000,000 ÷ $240,000 = 8.33.
Price over income, same period
A multiplier is price divided by income on a matching period. If the income is annual, the multiplier is annual.
How to use: Use this when extracting a multiplier from a sale price and income figure.
Exam Tip
Read whether the income is annual or monthly and keep it as given unless the question asks for a different period.
Common Mistakes to Avoid
- -Dividing income by price
- -Converting annual income to monthly without being asked
- -Misreading the income amount by a factor of ten
Concept Deep Dive
Analysis
This question tests extraction of an annual gross income multiplier as price divided by annual gross income. The result is a factor, rounded to two decimals. Distractors come from inverting the ratio or misreading the income amount or period.
Background Knowledge
A gross income multiplier relates price to gross income as a factor and is applied to the same level and period of income from which it was derived. Annual multipliers are much smaller than monthly ones for the same property. Mixing periods or income levels produces misleading value indications.
Real-World Application
An appraiser verifies a small office building sale at $2,000,000 with $240,000 of annual gross income. She records an annual GIM of 8.33 for comparison with other sales.
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