Question

1.     You are considering purchasing land for investment. The current landowner is willing sell you the land in exchange for a $90,000 note payable over 8 years. The landowner would require a payment of $13,925 at the end of each year for 8 years. Calculate the annual interest rate on this loan. (hint: this is an internal rate of return problem)

Interest rate:___________________

Answer 1

The land owner demands payment of $13925 each year for 8 years for payment of $90000 land To find IRR, we will use hit and trial method Cash flows 3 Year 4 PVr@10% 0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 PVr@7% PVF@5% 0.9350.952 0.907 0.864 0.763 0.823 0.713 0.784 0.6660.746 0.623 0.711 0.677 Present value annuity factor 5.335 5.971 6.463 13925 13925 13925 13925 13925 13925 13925 13925 0.873 0.816 10 0.582 13 14 15 16 17 18 Present values 74288.847 83150.33 90000.24 At 596, the value is equal to the value of land Otherwise we would have used interpolation to reach requied rate of interest Therefore,interest rate is 5%