A construction firm has estimated a net annual rent of Rs.90,000 on a building, at the prevailing annual rate of 9%. If the annual interest rate is revised to 5%, determine the increase in the capitalized value of the property.
Concepts: Let ‘P’ is the investment made by construction firm on annual basis on a building. The net annual rent generated form that is ‘R’ (here, R = Rs. 90,000/-). Now, the annual rate of return from this investment is:
Calculation: Given: ROR = 9 %; R = Rs. 90,000 ⇒ P = 90000/0.09 = Rs.1,000,000/- I.e. The original value of building is Rs.1,000,000/-. Now the rate of return is revised to 5 % but annual rent has to kept same i.e. R = Rs. 90,000 and ROR = 5 %; So, New value of property, P’ is given as:
P’ = Rs. 1,800,000 Increase in value of Property = P’ – P = Rs. 1,800,000 - Rs.1,000,000/- = Rs. 8,00,000/-