The value of land in Manhattan was in 1997 around $60 billion. Imagine that it i
ID: 2440644 • Letter: T
Question
The value of land in Manhattan was in 1997 around $60 billion. Imagine that it is 1626 and you are the economic adviser to the Dutch when they are considering whether to buy Manhattan. Further, assume that the relevant interest rate for calculating the present value is 4 percent per year. Would you advise the Dutch that a purchase price of $24 is a good deal or not? (Hint: Calculate the present value in 1626 of the land value as of 1997. Then compare that with the purchase price in 1626.)
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Explanation / Answer
The present value of land in Manhattan in 1626 when it was $60 billion in 1997 is given by
Future value x (1 + interest rate) ^ (-time period)
= 60,000,000,000 x (1 + 4%)^(1626 - 1997)
= $28,760
Since the present value of land in 1626 is $28760 and it can be purchased at $24, the deal is extremely good.
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