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The CEO has a chance to buy a vacant lot for $1.0 million

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The CEO has a chance to buy a vacant lot for $1.0 million. He will use it as a parking lot to cover taxes and other costs except interest. He believes it can be sold for $2 million in five years when the real estate market recovers. The company's cost of capital is 10%. Will the deal make the company richer of poorer? By how much? (you can use the present value function in Excel or PV tables)

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Solution Summary

Please help with the following problem involving cost of capital.

Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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  • "Thank you, this helped a lot. I was not sure how to plug in those numbers to a formula. This was a great help. Now I have to figure out how to explain cost of capital is used in net present value analysis, and how cost of capital is used in net present value analysis. This stuff gets confusing."
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