Annuities & Perpetuities: X is thinking of acquiring a house to rent out indefinitely

[Floj25]

Annuities & Perpetuities: X is thinking of acquiring a house to rent out indefinitely

Hey everyone! I am having trouble with this assignment:

X is thinking of acquiring a new house to rent out indefinitely. Ifhe rents it out, he will receive 3600 euro in the first year. He can borrow and lend at 5% p.a.(which is also his cost of capital).

a) If inflation is 2% per year, what is the fair price that he is ready to pay for the house?
b) X wants to take a 5-year loan to buy the house at the fair price.How big should the annual payment be if it is the same every year?
c) 10 years have passed, and X decides tosell all of his real estate to fund it. How much can he get for the house if the inflationforecasts were correct and are expected to continue at 2%, and the interest rate did notchange?

For A), I calculated the Present Value (=72.000) and adjusted it to the inflation rate (=73.440)
For B), I got the result 16036
We're not sure about C)

Thank you!

 

[tkhunny]

X is thinking of acquiring a new house to rent out indefinitely. Ifhe rents it out, he will receive 3600 euro in the first year. He can borrow and lend at 5% p.a.(which is also his cost of capital).

a) If inflation is 2% per year, what is the fair price that he is ready to pay for the house?
b) X wants to take a 5-year loan to buy the house at the fair price. How big should the annual payment be if it is the same every year?
c) 10 years have passed, and X decides tosell all of his real estate to fund it. How much can he get for the house if the inflationforecasts were correct and are expected to continue at 2%, and the interest rate did notchange?

For A), I calculated the Present Value (=72.000) and adjusted it to the inflation rate (=73.440)
For B), I got the result 16036
We're not sure about C)

Thank you!

There is nothing here about the cost of the Real Estate.

What is $72,000? Is that supposed to be the break even for a $3,600 annual perpetual rental at 5% at the end of each year? I mean, it is, but what has that to do with a purchase price?

Why would one 2% increase represent an adjustment for inflation for an eternal cash flow? Wouldn't one need to project $3,600 EVERY YEAR at 2% an discount those cash flows a 5%?

\(\displaystyle v =1/1.05\)
\(\displaystyle j = 1.02\)

\(\displaystyle 3600v + 3600jv^{2} + 3600j^{2}v^{3} + ... = \dfrac{3600v}{1-vj} = 120,000.00\)