A construction firm has estimated a net annual rent of ? 90,000 on a building, at the prevailing annual rate of interest of 9%. If the annual interest rate is revised to 5%, determine the increase in the capitalized value of the property.
Capitalized value:— It is defined as the amount of money whose annual interest at the highest prevailing rate will be equal to the net income received from the property. To calculate the capitalized value, it is necessary to know the highest rate of interest prevailing on such properties and net income from the property.
Net Rent = ? 90,000/year
Capital value = Net Rent/Rate of interest (decimal form)
= 90,000/0.9 = ? 10,00,000/
Final capitalised value = = 90,000/0.5 = ? 18,00,000/
Net increase = Rs. 8,00,000/-