Question

A construction firm has estimated a net annual rent of Rs.90,000 on a building, at the prevailing annual rate of 9%. If the annual interest rate is revised to 5%, determine the increase in the capitalized value of the property.
1. Rs.18,00,000
2. Rs.10,00,000
3. Rs.8,00,000
4. Rs.22,50,000
5.

Answer 1

Correct Answer - Option 3 : Rs.8,00,000

Concepts:

Let ‘P’ is the investment made by construction firm on annual basis on a building. The net annual rent generated form that is ‘R’ (here, R = Rs. 90,000/-). Now, the annual rate of return from this investment is:

\(ROR = \frac{R}{P} × 100\)

Calculation:

Given: ROR = 9 %; R = Rs. 90,000

⇒ P = 90000/0.09 = Rs.1,000,000/-

I.e. The original value of building is Rs.1,000,000/-. Now the rate of return is revised to 5 % but annual rent has to kept same i.e.

R = Rs. 90,000 and ROR = 5 %;

So, New value of property, P^’ is given as:

\(P^{'} = \frac {90000}{0.05} \)

P^’ = Rs. 1,800,000

Increase in value of Property = P^’ – P = Rs. 1,800,000 -  Rs.1,000,000/- = Rs. 8,00,000/-