Question

A guy bought a flat for $60,000 , then he sold it for $80,000 after 5 years. Annual rental income was $6,000 and it had increased 20% for each year. Furthermore, he paid $50 tax at first year and the tax had also increased $25 for each year as well. What is the rate of return for this investment?

Answer 1

• Net benefit (NB) = Rent income - Tax payment
• From year 2, Rent income, year N = Rent income, year (N - 1) x 1.20
• Rent income, year 5 = Rent income, year 4 + $80,000 (Sale value)
• From year 2, Tax payment, year N = Tax payment, year (N - 1) + $25

Rate of return (ROR) Net Benefit for is computed using Excel IRR function.

Year	Income ($)	Cost ($)	Net benefit ($)
0		60,000	-60000
1	6,000	50	5,950
2	7,200	75	7,125
3	8,640	100	8,540
4	10,368	125	10,243
5	92,442	150	92,292
		ROR of NI =	18.46%