Taking the general inflation rate into account

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Reference no: EM131810840

As inflation has increased throughout the world, the rental income of homes has decreased and a net annual rental income of 8% of the market value is common. On the other hand, the market value of homes tends to rise about 2% per year more than the inflation rate. As a result, both annual net rental income, and the resale value of the property rise faster than the inflation rate. Consider the following situation. A $150,000 property (with the house valued at $103,500 and the land at $46,500) is purchased for cash in Year 0. The market value of the property increases at a 12% annual rate. The annual rental income is 8% of the beginning-of-year market value of the property. Thus the rental income also increases each year. The general inflation rate f is 10%. The individual who purchased the property has an average income tax rate of 35%.

(a) Use MACRS depreciation, beginning January 1, to compute the actual dollar after-tax rate of return for the owner, assuming he sells the property 59 months later (in December).

(b) Similarly, compute the after-tax rate of return for the owner, after taking the general inflation rate into account, assuming he sells the property 59 months later.

Reference no: EM131810840

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