Julia currently is considering the purchase of some land to be held as an invest
ID: 2484855 • Letter: J
Question
Julia currently is considering the purchase of some land to be held as an investment. She and the seller have agreed on a contract under which Julia would pay $1,000 per month for 60 months, or $60,000 total. The seller, not in the real estate business, acquired the land several years ago by paying $10,000 in cash. Two alternative interpretations of this transaction are (1) a price of $51,726 with 6 percent interest and (2) a price of $39,380 with 18 percent interest. Which interpretation would you expect each party to prefer? Why? Show Calculations.
Explanation / Answer
Answer:
1)
Seller would be prefer (1) a price of $51,726 with 6 percent interest as the seller would like greater selling price (as in here 51,726 is greater than 39,380) and lower will the income in the shape of interest income { Here interest = 60000 - 51726 = $8,274 against interest of $20,620 i.e. 60000-39380 in alternative (2) }
Selling price can be calculated as :
Periodic payment (PP) = $1000
Rate of interest (r) = 6/12 = 0.5%
Periods (n) = 60
Therefore, selling price = PP [ 1 - { 1/ (1+r)^n } ] / r = 1000 [ 1 - { 1/ (1+0.005)^60 } ] / 0.005 = $51,726
Therefore total gain = 51726 - 10,000 = $41,726
2)
Buyer would prefer (2) a price of $39,380 with 18 percent interest as buyer would like lower buying price (as in here $39,380 is lower than $51,726) and greater will be the deduction in the shape of interest expense { Here interest = 60000 - 39380 = $20,620 against interest of $8,274 i.e 60000-51726 in alternative (1) }
Buying price can be calculated as :
Periodic payment (PP) = $1000
Rate of interest (r) = 18/12 = 1.5%
Periods (n) = 60
Therefore, Buying price = PP [ 1 - { 1/ (1+r)^n } ] / r = 1000 [ 1 - { 1/ (1+0.015)^60 } ] / 0.015 = $39,380
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.