Suppose that property can be considered a perpetuity, generating a perpetual income stream Ri each year forever Assume that the constant discount rate is r In the case of a perpetuity, the value of the property is simply V Ri r a Assume that Ri $4,000 and r 0 05 Compute the value of the property b ...

a V 4000005 80000 b V 4000006 66667 A higher discount rate r ...

Suppose that property can be considered a perpetuity, generating a perpetual income stream Ri each year forever.

Question:

Suppose that property can be considered a perpetuity, generating a perpetual income stream Ri each year forever. Assume that the constant is r. In the case of a perpetuity, the value of the property is simply V = Ri/r.
a. Assume that Ri = $4,000 and r = 0.05. Compute the value of the property.
b. Assume that Ri = $4,000 and r = 0.06. Compute the value of the property. Explain the effect of a higher on the value of the property.
c. Assume that Ri = $5,000 and r = 0.06. Compute the value of the property. Explain the effect of a higher net income stream on the value of the property.
d. Assume that Ri = $5,000 and r = 0.06. Assume further that there is a property tax Ti = $1,000 per year and public service provision value of Si = $800 per year. Compute the value of the property. Explain the effects of the property tax and public services on the value of the property.
Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...