How can we calculate the monetary value of a land factor that is valued only as a site and is therefore (for our purposes) perfectly durable? For example, suppose that a land-site can be used forever, and that its annual rent—that is, the value of its services in a single year, as of the beginning of that year—is $100. We assume again that the market interest rate is 10% per annum. The calculation of the land-site's capital value is similar to that for a durable capital good, except that it presents an infinite series, which can be evaluated using a familiar mathematical formula:
year 0
year 1
year 2
. . .
$100
+
$100 (1 / 1.1)
+
$100 (1 / 1.12)
+
. . . =
$100 (1/1.1n)
=
$100 (10/11n)
= $100 (1 / (1 - 10/11)) = $1100
At a 10% interest rate, the land-site has a market value of $1100. What would happen if the interest rate were zero?
Previous
(1 / 1.1)