There is a mountain in North Carolina. In five (5) years, it will be zoned for 1

Question

There is a mountain in North Carolina. In five (5) years, it will be zoned for 15 housing lots. At that time, one can install roads and infrastructure at a cost of $50,000 per lot. In the sixth year, with the infrastructure work complete, the lots can be sold for $150,000 each. Assume your opportunity cost is 7%, and your firm requires a 25% fee for land development. How much is the mountain worth today and why?

*****Please show be detailed steps and calculations as to how you arrived at the answer. Thanks!

Explanation / Answer

Today, mountain worth $624,695.83. This is the present value of cash flows generated from the mountain after 6 years at opportunity cost of the firm.

Opportunity cost, r 7% Firm fee, F 25% No of housing lots, L 15 infrastructure cost per lot, IC 50000 lot price, LP 150000 Number of years for project completion, n 6 Total infrastructure cost (IC*L) 750000 Total lot price, (L*LP) 2250000 Firm fee (F*total lot price) 562500 Cash flow generated from mountain, (Total LP-firm fee-Total IC), FV 937500 PV = FV/(1+r)^n Worth of mountain $624,695.83

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