An investor is evaluating the purchase of 100 acres of land today for $150,000.

Question

An investor is evaluating the purchase of 100 acres of land today for $150,000. The investor expects to be able to sell the land 3 years from now for $380,000. The investor wants to know the escalated dollar DCFROR on invested dollars that she can expect to receive on this investment. Gain from the sale should be assumed to be individual long term capital gain, taxed at the effective ordinary income tax rate, assumed to be 30%. Property tax costs of $3,000 in each of the years 1, 2, and 3 are assumed to be expensed against other ordinary income each year including year 3. After determining the escalated dollar DCFROR on invested dollars, determine the equivalent constant dollar DCFROR if inflation is assumed to be 10% per year over the 3 year investment life.

A) DCFROR=22.56%; i'=15.87%
B) DCFROR=26.48%; i'=14.98%
C) DCFROR=22.56%; i'=14.98%
D) DCFROR = 26.48%; i' = 15.87%

Explanation / Answer

d.DCFROR=26.48%,I=15.87%

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