Which statement is true about market value relative to investment value?

Which statement is true about market value relative to investment value?

• A. Market value is independent of the individual investor's cash flows and risk.
• B. Market value depends on the investor's cash flows and risk.
• C. Market value equals the investment value for all investors.
• D. Market value is affected by replacement cost.

Answer: (A)

Market value is the price a property would bring in an open market, determined by what buyers are willing to pay under current conditions. This price isn’t tailored to any one investor’s finances, so it doesn’t depend on that investor’s cash flows or risk preferences. Investment value, on the other hand, is specific to an individual because it reflects that investor’s own cash flows, financing, taxes, and risk tolerance. So market value being independent of an individual’s cash flows and risk is the correct idea. Replacement cost is a separate concept used in some cost-based valuation approaches, and while it can influence value in those contexts, market value itself is driven by market demand and income/risk considerations, not by replacement cost. That’s why the other statements don’t fit.

Market value is the price a property would bring in an open market, determined by what buyers are willing to pay under current conditions. This price isn’t tailored to any one investor’s finances, so it doesn’t depend on that investor’s cash flows or risk preferences. Investment value, on the other hand, is specific to an individual because it reflects that investor’s own cash flows, financing, taxes, and risk tolerance. So market value being independent of an individual’s cash flows and risk is the correct idea.

Replacement cost is a separate concept used in some cost-based valuation approaches, and while it can influence value in those contexts, market value itself is driven by market demand and income/risk considerations, not by replacement cost. That’s why the other statements don’t fit.