Question

You are interested in buying a house and renting it out. You expect to receive a monthly net income of $1400 from rent. You then expect to sell the house for $336,000 at the end of 53 months. If your discount rate on this investment is 9% (compounded monthly), how much is this property worth to you today? Assume that you receive rent at the beginning of each month and you receive the first rent the same day you purchase the property. Round to the nearest cent.

Answer 1

$287,625.12

Step-by-step explanation:

The market price of this property should be equal to the present value of all rental income plus the sales proceed from sales of the asset.

1. Present value of rental cashflow = 1,400 + 1,400/[1 + (9%/12)] + ... + 1,400/[1 + (9%/12)]^52 = 61,498.67

2. Present value of proceed from sales of the asset = 336,000/[1 + (9%/12)]^53 = 226,126.45

So, market price of this property should be equal to 61,498.67 + 226,126.45 = $287,625.12