Property taxes in a particular district are 1% of the purchase price every year.

Question

Property taxes in a particular district are 1% of the purchase price every year. If you just purchased a $150,000 home, what is the present value of all the future property tax payments? Assume that the house remains worth $150,000 forever, property tax rates never change, and that a 3% interest rate is used for discounting.

The present value of all the future property tax payments is $

2. The present value of a loan in which $3000 is to be paid out a year from today with the interest rate equal to 3% is $ (Round your response to the neareast two decimal place)

Explanation / Answer

1. Annual tax payment = 150000*0.01 = $1,500

Present value of a perpetual cashflow C at r% = C/r

Present value of $1500 forever at 3% = 1500/0.03 = $50,000

2. Let the present Value be P.

P*(1+3%) = 3000

P = 3000/1.03 = $2,912.62

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