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Years Purchase Formula:
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Years Purchase in perpetuity is defined as the capital sum required to be invested in order to receive a net annual income of rs/- 1 at a certain rate of interest.
The calculator uses the Years Purchase formula:
Where:
Explanation: The formula calculates the capital investment needed to generate a net annual income of 1 unit, considering both the interest on capital and sinking fund requirements.
Details: Years Purchase is crucial in property valuation and investment analysis, helping determine the appropriate capital investment required to achieve desired annual returns while accounting for capital recovery through sinking funds.
Tips: Enter the rate of interest on capital and rate of sinking fund as decimal values (e.g., 8% = 0.08). Both values must be non-negative, and their sum must be greater than zero.
Q1: What is the practical application of Years Purchase?
A: Years Purchase is primarily used in real estate valuation to determine the capital value of property based on its net annual income.
Q2: How does sinking fund affect Years Purchase?
A: The sinking fund component reduces the Years Purchase value as it represents the portion of income set aside for capital recovery, increasing the total required return.
Q3: Can Years Purchase be used for finite periods?
A: This specific formula calculates Years Purchase in perpetuity. Different formulas exist for finite time periods with capital recovery.
Q4: What are typical values for Years Purchase?
A: Values typically range from 8-20 years, depending on interest rates and sinking fund requirements. Lower rates result in higher Years Purchase values.
Q5: How does this differ from simple capitalization rate?
A: Years Purchase incorporates both return on capital and return of capital (through sinking fund), providing a more comprehensive valuation approach than simple capitalization rates.