50.1K

Verified Solution

Link Copied!

Assume that the price of real estate is determined byP=PV(all cash flows generated by the real estate).

After you have graduated you work for some years and can savesome money. You decide to invest in a house which you want to rentout for a rate of SEK 11,000 per month. Assume that the rental ratewill increase with 1.2% per year (which is 0.1% per month). (Forthe sake of simplicity, also assume that there are no further costsinvolved e.g. renovating or repair).

a) As the market risk of renting out the house is low, you thinkthat a discount rate of 5.0% (APR with monthly compounding) wouldbe appropriate. What is the price of the house under the assumptionthat the cash flows from rent will last forever?

Answer: the price of the house under these assumptionsis SEK  million. (round totwo decimals)

b) If discount rate is 1% lower than 5.0% what is the price ofthe house?

Answer: the price of the house is SEKmillion. (round to two decimals)

c) You want to make the valuation of the house more realistic byassuming that the time horizon for the valuation should be 50years. Again, you assume that the house will generate SEK 11,000rental income per month for the next 50 years, and the rentalincome is assumed to grow by 1.2% per year (or 0.1% per month).What is the value of the house with a discount rate of 5.0% APRwith monthly compounding?

Answer: the price of the house is SEKmillion. (round to two decimals)

d) Make the same assumptions as in (c) but assume a 1% lowerdiscount rate. What is the price of the house?

Answer: the price of the house is SEKmillion. (round to two decimals)