Question

One year ago, you paid $15,000 for an empty plot of land. Today, you are considering developing it into a parking lot. It will cost you $50,000 today to turn this land into a parking lot. As a parking lot, you anticipate that it will generate $8,000 in revenue each year forever, starting one year from today. The required return for this project is 14% annually. Assume that you have no other ideas for what to do with this land; if you don’t build the parking lot, it will not be used for anything else. Also assume you will never sell this land. From a financial perspective, is turning this land into a parking lot today a good idea?

Answer 1

Yes, it will be financially advantageous to convert the land into parking lot

Step-by-step explanation:

F0 = 50,000 dollars

cash flow: 8,000 at perpetuity

present value of a perpetuity:

`(C)/(r)`

8,000 / 0.14 = 57,142.8571

57,124.86 - 50,000 = 7,124.86

As the value of the investment exceeds the cost it is a good idea to convert the land into parking lot.