LAND RESIDUAL METHOD
EXAMPLE
Determine the land value from the information below using the land residual method:
Building value: |
$100 000 |
Required return on building: |
12% per annum |
Expected life of building: |
20 years |
Required return from land: |
8% per annum |
Replacement of capital: |
8% per annum |
Net annual income: |
$25 000 |
1. STEP 1
Net annual income: |
25 000 |
Less return on building: 12% * 100 000 = |
(12 000) |
Sinking Fund Factor: 1/((1.0820-1)/0.08) = 0.0219 |
|
Sinking fund contributions to replace building: 0.0219 * 100 000 = |
(2190) |
| ----------- |
|
Therefore, income derived from land = |
10 810 pa |
LAND VALUE: |
|
10810 * 100/8 = |
135 125 |
say 13 |
See building residual method