View the step-by-step solution to:

Question

You are considering the purchase of a parcel of land for $20 million, which sits on the edge of a growing part of

Phoenix.  You expect significant residential and commercial growth to reach this area within the next 10 years, greatly lifting the value of the property.  You have an idea:  purchase the land now, lease it to an individual for 10 years who will create an commuter parking lot together with a bus service into the heart of the city, and then you sell the land after 10 years for an estimated $50 million after-tax.


You estimate you can lease the land to the individual for $1 million before-tax for the first year, with an escalation clause of 3% per year.  You will also face property tax expense of $0.1 million for the first year which you estimate will increase 3% per year.  You will be able to deduct the property tax from your lease revenues for tax purposes.  Assume the first lease and property tax payments occur at the end of year 1.


Your tax rate is 25 percent, and your cost of capital (discount rate) is 10 percent.


What is the Net Present Value (NPV) now (end of year 0) of purchasing the land, leasing it, and selling it after 10 years per the estimated factors above?  

Recently Asked Questions

Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

  • -

    Study Documents

    Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

    Browse Documents
  • -

    Question & Answers

    Get one-on-one homework help from our expert tutors—available online 24/7. Ask your own questions or browse existing Q&A threads. Satisfaction guaranteed!

    Ask a Question
Let our 24/7 Finance tutors help you get unstuck! Ask your first question.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes
A+ icon
Ask Expert Tutors