By John Sage Developer
Let’s discuss how we work out the internal rate of return.
- we earn $1,000 per month in rental fee.
- we pay expenses for rental monitoring,rates and tax obligations of $100 per month.
- these expenses are equally topped the year of our investment.
- we call for a minimum return of 6% from our investments
We for that reason obtain a net $900 per month. The initial $900,which is gotten at the end of the initial month,is far more useful to us than the last $900,gotten at the end of the year.
We can calculate $895.52 is the Present Value of the initial $900 payment,gotten after one month.
This is called the “net existing value” since it is “net” of business expenses.
The figure of $900 marked down by our minimum return of 6% per annum,paid monthly,equates to $895.52 if paid after one month.The $900 gotten in one month,is considered the equal to obtaining $895.52 today,based upon a minimum needed return of 6%.
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After year,when we obtain our twelfth payment of $900 at the end of year,at 6% the Net Present Value is $847.71.
With 6% the benchmark rate of return,the financier will be neutral about obtaining either $847.71 today or waiting a year to obtain $900.
If we add up all the repayments of $900 per month,for year but discount rate each payment according to when the month-to-month payment is gotten,today value of all the 12 month-to-month repayments contribute to $10,457.03. This amount represents what we are happy to approve today instead of waiting to obtain $900 each month for year,presuming a price cut rate of 6% on our loan.
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