Sairah purchased an investment property for $350,000, 3 years ago. The after-tax cashfow of the property has been $35,000 per year to date, but market conditions have improved and Sairah expects the cashflow to improve to $42,000 per year for the next 25 years (assume these are year end cashflows). The annual cost of capital (or cap rate) for this area is 9%. What is the value of the property today?
The value of a property is a sum of all cash flows it generates for it's owner. As we talk about present value, we're interested only in future cash flows (for next 25 years) In the next 25 years she will have42000*(1/(1+0.09)+1/(1+0.09)^2+...+1/(1+0.09)^25))=412548 So this property price is $ 412,548.