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How much would Susan be willing to pay for an investment property today if she believes it will generate $30,000 per year in rent indefinitely (after deducting agent fees and other costs), growing at 1% above inflation if he can achieve a real rate of return on similar investments of 6% per annum using the ‘Present value of future rent’ valuation approach (to the nearest dollar)?Please do not include dollar signs or commas in your answer.

Question

How much would Susan be willing to pay for an investment property today if she believes it will generate $30,000 per year in rent indefinitely (after deducting agent fees and other costs), growing at 1% above inflation if he can achieve a real rate of return on similar investments of 6% per annum using the ‘Present value of future rent’ valuation approach (to the nearest dollar)?Please do not include dollar signs or commas in your answer.

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Solution

To calculate the present value of future rent, we can use the Gordon Growth Model (also known as the Dividend Discount Model). This model is used to determine the present value of a series of future cash flows that grow at a constant rate. The formula is:

PV = CF / (r - g)

where:

  • PV is the present value
  • CF is the cash flow per period (in this case, the annual rent)
  • r is the required rate of return
  • g is the growth rate

In this case, Susan expects the property to generate $30,000 per year in rent, her required rate of return is 6%, and the rent is expected to grow at a rate of 1% above inflation.

So, we can plug these values into the formula:

PV = $30,000 / (0.06 - 0.01)

Solving this equation gives us the present value of the investment property.

PV = 30,000/0.05=30,000 / 0.05 = 600,000

So, Susan would be willing to pay $600,000 for the investment property today.

This problem has been solved

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