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7 February, 08:27

Property taxes in a particular district are 4% of the purchase price of a home every year. If you just purchased a $250,000 home, what is the present value of all the future property tax payments.

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  1. 7 February, 08:44
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    Assume the interest rate used for discounting is 5%.

    Then, the present value of all the future property tax payments is $200,000.

    Explanation:

    We have the annual property tax payment is calculated as: Purchased price * tax rate = 250,000 * 4% = $10,000.

    The tax payment will form a perpetuity of $10,000 each (that is: C = 10,000). We apply the formula for calculating present value of perpetuity with assumption that discount rate is 5% to come up with the answer as below:

    PV = C/i = 10,000/5% = $200,000.

    So, the answer is $200,000.
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