You have the opportunity to buy a piece of land with your brother-in-law, Joseph

Question

You have the opportunity to buy a piece of land with your brother-in-law, Joseph Wheeler Dealer. The land can be purchased for $2,000,000 and Joseph is 100% positive that it can be sold for $3,000,000 in eight years. In fact, he will guarantee this sale price (assume the $3,000,000 is actually achieved). As he says, "this is a no-brainer 50% return." What do you think the actual returns will be? The property is in Miami-Dade County Florida and needs to be fenced. You might also need liability insurance. You can pay cash or finance the project (easier to model a cash transaction). The cleanest assumption is to assume no debt. Do you have all the holding costs? Probably the best way to do this is with a short excel program. This requires TVM calculations!

Explanation / Answer

Let the discount rate be 10%

Present value of 3000000 to be received after 8 years at a discount rate of 10% = 3000000/(1.10)^8

= 3000000*0.4665 i.e 1399500

hence it is a loss because the NPV of the project is negative

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.