For this house transaction cost question, you first need to assume a proper discount rate for the

$4,000/month rent. At a 7%effective interest rate per year, your true monthly rate is 1.071/12 − 1 ≈ 0.5654%

per month). A reasonable assumption to value the rent stream is as a 1-year annuity, whose value is

$4,000/r . [1 − 1/(1 + r)12] ≈ $46,281 today. Therefore,

Solve this to x ≈ $1,115,031, so your capital appreciation must be 11.5% per annum for this project to be zero NPV for you.

Transcribed Image Text:

-($1,000,000+ $5,000) + $46,281 + x-(1-8%) 0 1.07