Question

You should NOT spend too much time on this problem. Think of all the costs, the TVM and estimate an annual return (IRR) for this type of investment. Think: MAP the cash flows.

You have the opportunity to buy a piece of land with your brother-in-law, Joseph Wheeler Dealer. The land can be purchased for $1,000,000 and Joseph is 100% positive that it can be sold for $1,500,000 in seven years. In fact, he will guarantee this sale price (assume the $1,500,000 sale price is actually achieved). As he says, "this is a no-brainer 50% return." What do you think the actual returns will be? The property is in Miami-Dade County Florida and needs to be fenced. You might also need liability insurance. You can pay cash or finance the project (easier to model a cash transaction). The cleanest assumption is to assume no debt. (There are no "tricks' to this, you just need to an investment analysis and think about all fees, income and costs associated with transaction). Do you have all the holding costs? Probably the best way to do this is with a short excel program. This requires TVM calculations! Is this a 50% return? Or is that golf club accounting.

There is a penalty for late submission. But, no submission means a deduction from the finale grade. This is a pass/fail assignment.

***Please complete/show on excel, using TVM***

Answer 1

We need to find rate at which 1000,000 gets compounded to 1500,000 after 7 years. Surely it would be less than 50% return as it is held for more than a year

Purchase Price	1000
Rate of Return	5.96%
Years	7
Sale Price	1500
Value after 7 years	1500	1000*(1+5.96%)^7

Effective Rate of Return is 5.96%