A rental property is providing an acceptable market rate of return of 13 percent

Finance Aug 05, 2020

A rental property is providing an acceptable market rate of return of 13 percent. You expect next year's rent to be $1 million and that rent is expected to grow at 3 percent per year forever. What is the current value of the property

Expert Solution

Computation of Current Value of Property:

Current Value of Property = Next Year' Rent/(Market Rate of Return - Growth Rate)

Here,

Next Year' Rent = $1 million

Market Rate of Return = 13%

Growth Rate = 3%

Current Value of Property = $1 million / (13%-3%)

= $1 million / 10%

Current Value of Property = $10 millions

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