You own a house on a plot of land. The land has a value of $150,000. Use of the house has a value to you. You believe that the first years benefit to you amounts to $8000. Assume that this is as though you get $8000 at the end of the first year. Thereafter the annual benefits diminish at 4% per year. Furthermore, assume that the house will have to be demolished in exactly 22 years. Assume that rates are 8% p.a. Assume the land value remains unchanged over time.

a. What is the total value of the house and land?

b. You enter into a contract to sell the house. The purchaser will take possession in exactly 6 years. The purchaser uses the same method of valuation as you have. However, you want payment today. What amount will the purchaser be willing to give you today?

How are these answers obtained?

Land value g Life Rate $ 150,000.00 $ 8,000.00 4.00% 22 years 8.00% a. Value today $ 211,671.46 b. Assume land value unchanged # years later 6 1st benefit $ 6,262.06 Remaining benefits 16 Value at t=6 $ 194,257.09 Price today $ 122,414.92 Land value g Life Rate $ 150,000.00 $ 8,000.00 4.00% 22 years 8.00% a. Value today $ 211,671.46 b. Assume land value unchanged # years later 6 1st benefit $ 6,262.06 Remaining benefits 16 Value at t=6 $ 194,257.09 Price today $ 122,414.92