Question

A building owner changes net of $30 in the first year, $32 in the second year, and $34 in the third year. Using a 10 percent discount rate, what is the effective rent over the three years ?

Answer 1

To calculate the effective rent over the three years, we need to discount the rent amounts to present value using the discount rate of 10% as given in the question.
The cash flows are:
Year 1:$30
Year 2:$32
Year 3:$34

The present value is calculated as: (Cash flow in year 1)/(1+discount rate)^1+(Cash flow in year 2)/(1+discount rate)^2+(Cash flow in year 3)/(1+discount rate)^3
=$30/(1+10%)^1+$32/(1+10%)^2+$34/(1+10%)^3
=$30/(1.1)^1+$32/(1.1)^2+$34/(1.1)^3
=$30/1.1+$32/1.2+$34/1.331
=$27.27272727+$26.66666667+$25.54470323
=$79.48409717
Effective rent over the three years=$79.48409717