What is the capital value of a premises consisting of land and a well-built house, let out for ₹800/- per month inclusive of all taxes. The house is in good condition. The rent by comparison with other premises is fair and is likely to be maintained. Assume the following data : Outgoings : 18% of the gross rent, expected rate of return : 8%, future life of the building : 60 years.
- A₹98,400/-Correct
- B₹141,687·50/-
- C₹110,687·50/-
- D₹88,400/-
Solution
Concept
Capital value = net annual income × years’ purchase
Formula
Capital value = Net income × (100 / rate of return)
Step-by-step solution
1. Gross annual rent = 800 × 12 = ₹9,600. 2. Outgoings = 18% = ₹1,728, so net income = ₹7,872. 3. Years' purchase = 100 / 8 = 12.5 (the premises include land, so the income is treated as perpetual). 4. Capital value = 7,872 × 12.5 = ₹98,400.
Explanation
For a property with land and a well-maintained building, the net rent is capitalised at the expected rate of return.
Why the other options are wrong
The other values do not equal 7,872 × 12.5.
Shortcut
CV = (rent × 12 × 0.82) × 12.5.
Common mistake
Forgetting the outgoings.
Correct answer: A) ₹98,400/-