Rent loss of $400 per month attributable to an external condition, capitalized at 8%, indicates a value loss of:
Correct Answer
C) $60,000
Why this is correct: First, annualize the monthly rent loss: $400 × 12 months = $4,800 per year. Then, capitalize the annual loss at the 8% rate: $4,800 ÷ 0.08 = $60,000. This represents the present value of the perpetual income stream lost. Why the other choices are wrong: $3,200, applying the rate to monthly rent is wrong; it incorrectly divides monthly rent by the rate without annualizing. $4,800, the annual loss itself is wrong; this is the annual income loss, not its capitalized value. $5,000, dividing monthly rent by the rate is wrong; $400 ÷ 0.08 = $5,000, but this forgets to annualize. Exam tip: Always convert monthly figures to annual before capitalizing.
Why This Is the Correct Answer
Why this is correct: First, annualize the monthly rent loss: $400 × 12 months = $4,800 per year. Then, capitalize the annual loss at the 8% rate: $4,800 ÷ 0.08 = $60,000. This represents the present value of the perpetual income stream lost. Why the other choices are wrong: $3,200, applying the rate to monthly rent is wrong; it incorrectly divides monthly rent by the rate without annualizing. $4,800, the annual loss itself is wrong; this is the annual income loss, not its capitalized value. $5,000, dividing monthly rent by the rate is wrong; $400 ÷ 0.08 = $5,000, but this forgets to annualize. Exam tip: Always convert monthly figures to annual before capitalizing.
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