National Real Estate Exam (PSI)Real Estate CalculationsHard
An investor purchases a property for $160,000. The property appreciates at a rate of 4% per year, compounded annually. What is the property's value at the end of 2 years?
- A$173,056
- B$172,800
- C$176,000
- D$174,200
Show answer & explanationAnswer & explanation
Correct answer: A. $173,056
Compound appreciation applies the growth rate to the new value each year. Year 1: $160,000 × 1.04 = $166,400. Year 2: $166,400 × 1.04 = $173,056. Simple (non-compounded) growth would incorrectly give $172,800.
Why the other options are wrong
- B. This reflects simple (non-compounded) 8% growth, not compound growth.
- C. This uses an incorrect flat percentage rather than compounding.
- D. This overstates the compounded result.
Compound Appreciation
Compound appreciation applies a percentage increase to the previous year's ending value, not the original value, each period.
- Year 2 value = Year 1 value × (1 + rate)
- Compounding differs from simple interest, which uses original principal each year
- Small rate differences compound significantly over time
Memory trick: Grow on last year's total, not the original price.