One real estate sales technique is to encourage customers or clients to buy today because the value of the property will probably increases during the next few years. "Buy this lot today for $28,000. In two years, I will project it will sell for $32,500. "The buyer has a CD worth $30,000 now, which earns 4% compounded annually and will mature in 2 years. Cashing in the CD now requires the buyer to pay an early withdrawal penalty of $600.
a) Should the buyer purchase the land now or in two years?
b) What are some of the problems with waiting to buy land?
c) What are some of the advantages of waiting?
d) Lots in a new subdivision sell for $15,600. Assuming that the price of the lot does not increase, how much would you need to invest today at 8% compounded quarterly to buy the lot in one year?
e) I have inherited $60,000 and plan to buy a home. If you invest the $60,000 today at 5%, compounded annually, how much could you spend on the house in one year?
f) If you intend to spend $60,000 on a house in one year, how much of your inheritance should you invest today at 5%, compounded annually? How much do you have left to spend on a car?
Dear student, please refer to the attachment for the solutions. Thank You.
Solution (a),( b) and (c):
The buyer has a C.D. worth $30000
If, he wants to buy the land now, he will have to cash the C.D. and will eventually have to pay $600 as penalty. So, he will have $(30000-600) = $29400
The present value of the land is $28000, which is lesser.
So, if the buyer buys the land today, he will be left with $29400-$28000 = $1400
If he wishes to ...
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