a. Rate of interest : 8%
Today’s Price = $3,000,000
Price after 5 years = $4,000,000
Present Value of price after 5 years = $4,000,000 / (1+0.08)^5
= $2,722,333.88
b. The property is not worth investing, since investing in the land is $3,000,000 while it can be sold today as $2,722,333, thus not a profitable investment as it will incur a loss of $277,667 ($3,000,000 - $4,000,000).
c. Present value of rent of 5 Years = $200,000*PVIFA(8%,5)
= $200,000*3.99999
= $798,542.01
d. NET PRESENT VALUE OF INVESTMENT = PRESENT VALUE OF FUTURE CASH FLOWS – INITIAL INVESEMTENT
NET PRESENT VALUE = $2,722,333.88 + $798,542.01 - $3,000,000
NET PRESENT VALUE = $520,874.80
Since the Net Present value is positive, it is worth investing in the land.
