Question

Property taxes in a particular district are 3​% of the purchase price every year. If you...

Property taxes in a particular district are

3​%

of the purchase price every year. If you just purchased a

​$150,000

​home, what is the present value of all the future property tax​ payments? Assume that the house remains worth

​$150,000

​forever, property tax rates never​ change, and that a

5​%

interest rate is used for discounting.

The present value of all the future property tax payments is

​$

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Homework Answers

Answer #1

Property tax each year = 3% of purchase price each year

The property tax never change.
Property purchased = 150,000

Assume house remains worth 150,000 forever.

This indicates that the life is infinite.

Therefore, property tax per year will be = 3% * 150,000 = 4,500

Interest Rate = 5%

Calculate present value of all annual property tax continue forever.
In case of perpetual life, the formula to calculate present value of annual cash flow is

Capitalized Cost = Annual Cash Flow / Rate of Interest

CC = A / i

CC = 4,500 / 0.05

CC = 90,000

The present value of all future tax payments is $90,000.

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