You can buy a property which has a head lease with a reliabl

You can buy a property which has a head lease with a reliable tenant for 20 years. The rental is constant at R150 000 per year, with payments made at the beginning of each year. The value of the property at the end of the 20 years is forecasted to be R11 500 000. What should you expect to pay for the property today if you require an internal rate of return of 18% on your investment? (2)

Solution

Solution:

Value of property after 20 years = R11500000

Annual lease rent revenue = R150000

Required rate of return = 18%

Amount to be paid for the property today to earn internal rate of return 18% = Present value of annual rent revenue and value of property after 20 years

= R150000 * cumulative PV Factor for annuity due for 20 periods at 18% + R11500000 * PV Factor at 18% for 20th period

= R150000 * 6.316241 + R11500000 * 0.036506 = R 1,367,251