South Dakota Certified Appraiser Assessor (CAA) Practice Exam

The formula that correctly represents the relationship between value, annual income, and required rate of return in the income approach is derived from the basic principle that value (V) is determined by the income generated by the property and the rate of return investors expect.

In this context, the income approach assumes that the value of a property is equal to the income it produces divided by the rate of return investors require for that level of risk. Mathematically, this translates to the formula where value is equal to income divided by the rate of return (V = I / R). This relationship indicates that as income increases, the value of the property increases, and conversely, for a given level of income, an increase in the required rate of return will decrease the property’s value.

Understanding this formula is vital for appraisers, as it allows them to estimate the value of income-producing properties based on consistent income streams and the fluctuating expectations of investors in the market. This approach is particularly useful in real estate transactions where properties are evaluated based on their ability to generate future income.