Annual PGI is $360,000 and combined vacancy and collection loss is explicitly 8% of that same PGI base. There is no other income. What annual EGI remains?
Correct Answer
B) $331,200
360000×(1−0.08) = 331200. Common errors: reporting the loss instead of EGI gives $28,800; not deducting the 8% loss gives $360,000; dividing by 1.08 instead of multiplying by 0.92 gives $333,333.
Why This Is the Correct Answer
Option B is correct because EGI equals PGI less vacancy and collection loss: $360,000 × (1 − 0.08) = $331,200. The loss is $28,800, and $360,000 − $28,800 = $331,200.
Why the Other Options Are Wrong
Option A: $28,800
Option A, $28,800, is the loss amount itself: $360,000 × 0.08 = $28,800. EGI is what remains after deducting the loss, which is $331,200.
Option C: $333,333
Option C, $333,333, comes from dividing by 1.08 instead of multiplying by 0.92: $360,000 ÷ 1.08 = $333,333. The loss is stated as 8% of PGI, so EGI is $360,000 × 0.92 = $331,200.
Option D: $360,000
Option D, $360,000, does not deduct the 8% loss at all; it is simply the PGI. EGI is $360,000 − $28,800 = $331,200.
Keep what is left
If 8% of PGI is lost, you keep 92%, so multiply PGI by 0.92. The lost amount is the deduction, not the answer.
How to use: Use this when converting PGI to EGI with a stated vacancy and collection percentage.
Exam Tip
Note the base for the percentage; when the loss is a percentage of PGI, multiply PGI by one minus the rate rather than dividing.
Common Mistakes to Avoid
- -Reporting the vacancy loss as EGI
- -Dividing by one plus the rate instead of multiplying by one minus the rate
- -Forgetting to deduct vacancy and collection loss
Concept Deep Dive
Analysis
This question tests the step from potential gross income to effective gross income. The combined vacancy and collection loss is a percentage of PGI and is subtracted from it. The distractors report the loss itself, skip the deduction, or divide instead of multiply.
Background Knowledge
Potential gross income minus anticipated vacancy and collection losses equals effective gross income. Other income, if any, is added to reach total EGI. EGI less operating expenses gives net operating income.
Real-World Application
An appraiser estimates $360,000 of potential gross income for a rental property and supports a combined 8% vacancy and collection loss from market data. She reports EGI of $331,200 before deducting operating expenses.
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Annual PGI is $250,000 and combined vacancy and collection loss is explicitly 12% of that same PGI base. There is no other income. What annual EGI remains?