David Beckham has bought a house for $250,000, of which $50,000 is the value of

Question

David Beckham has bought a house for $250,000, of which $50,000 is the value of the land. Beckham expects that the value of the property will increase at the compound rate of 4% per year. He will rent the house for the next five years and then sell it. He will depreciate the house uniformly over 25 years. The income tax rate of Beckham is 30%, and the risk-adjusted discount rate is 12%. The annual expenses on the property (real estate taxes, maintenance, etc.) are $6000, realized at the end of each year. Find the amount of rent that Beckham must collect at the end of each year to break even. PLEASE SHOW HOW TO WORK IN EXCEL

Explanation / Answer

Let revenue per annum = y comounded value of house after five years = 304163. Depreciation = 250000/25 = 10000 per annum Note: Assuming cost of land is part of house and depreciation is calculated on cost of land aslo, which is included in cost of house Year Revenue net of tax Cost of house Tax saving on depreciation Tax saving on maintenance Sale price PVAF @ 12 % Present Value 0 -250000 1 -250000 -250000 -250000 1 .7y 3000 1800 0.8929 4285.92 4285.92*.7y 3000y 2 .7y 3000 1800 0.7972 3826.56 3826.56*.7y 2679y 3 .7y 3000 1800 0.7118 3416.64 3416.64*.7y 2392y 4 .7y 3000 1800 0.6355 3050.4 3050.4*.7y 2135y 5 .7y 3000 1800 304163 0.5674 175305.61 175305.60*.7y 122714y ,-250000+132919.9y Now, this mus be equal to 250000 to break even ,-250000 + 132929.9y = 250000 y = 3.76

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