A property is purchased for $175,000 and appreciates at 4% per year, compounded annually. What is the value of the property after 2 years?
Correct Answer
B) $189,280
Compound appreciation applies the growth rate to the new value each year, not just the original. Year 1: $175,000 × 1.04 = $182,000. Year 2: $182,000 × 1.04 = $189,280. Note the difference from simple appreciation: simple appreciation would yield $175,000 + ($175,000 × 4% × 2) = $189,000 (option C). The compounded result of $189,280 is slightly higher because Year 2 growth is calculated on the already-appreciated Year 1 value. Real estate exam questions typically use compound appreciation unless stated otherwise.
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