Here are the formula for Present Value ( PV )
1 / (1+i )n = PV
or
where i = interest rate, n = numbers of years tenancy agreement
we need Present Value ( PV ) in calculation of Year Purchase ( YP )
Example :
we assume that i = 8.0%, n = 5 years
PV
= 1 / ( 1+ 0.08 )5
= 1 / ( 1.08 )5
= 1 /1.669
= 0.6806
YP
= (1 - PV) / i
= (1 - 0.6806) / 0.08
= 0.319 / 0.08
= 3.9927
Capital Value
= Net Income x Years' Purchase
= RM 10,000 x 3.9927
= RM 39,927
Note :
i = interest rate
- base rate from Bank Negara = 6.85% + 1.5% = 8.35% )
- 1.5% is the risk factor which can be adjusted to maximum to 2.5% depend on the risk is higher
- for easy calculation we assume that the i = 8.0% for this exercise
