Question

5. Jenny bought a rental property for $1,000,000 and leased it for 24 months. Rents will be collected at the beginning of each month and the residual value after 24 months will be $800,000. To earn 24% rate of return per year on this lease, how much rent/month should be charged?

Answer 1

Answer -

Step - (1) - Information Given :-

Cost of rental property = $1000000.

Lease term = 24 months.

Monthly rate of return = (24% / 12) = 2%.

Residual value = $800000.

.

Step - (2) - Calculation of the amount of monthly lease payments :-

= [Cost of rental property - Present value of residual value] / PVAF of $1 _{(i%, n)}

= [$1000000 - $800000 * PVIF of $1 _{(i%, n)}] / PVAF of $1 _{(i%, n)}

= [$1000000 - $800000 * PVIF of $1 _{(2%, 24)}] / PVAF of $1 _{(2%, 24)}

= [$1000000 - ($800000 * 0.62172)] / 18.9139

= ($1000000 - $497376) / 18.9139

= $26574

Therefore, the amount of rent per month should be charged = $26574.