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(1) A business will receive rent of $10,000 pa on a 500 year lease.
What is the present value of the rental receipts if the discount rate is 5%?
A! $200,000
B! $100 million
C! $1 million
D! $5 million And (2) A business will receive rent of $10,000 pa on a 999 year lease, starting at year 3.
What is the present value of the rental receipts if the discount rate is 5%?
A! $200,000
B! $172,770
C! $181,410
D! $185,900…………What is the difference between these questions and their answers?And why?Would you explain for me?Q1. 500 yrs is more or less a perpetuity. The cumulative discount factor for a perp is 1/r, so heremthe PV is
10,000/0.05 = 200,000
Q2. Also like a perp, but no flow occurs until time 3. Then1/r formula works for perps,starting time 1, so for this example, the PVs ofmthe time 1 and 2 flows have to be removed.
PV = 10,000/0.5 – 10,000/1.05 – 10,000/1.05)^2 = 181,410.
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