In 1985, Alice paid $20,000 for an option to purchase ten acres of land. By paying the $20,000, she bought the right to buy the land for $100,000 in 1992. When she acquired the option in 1985, the land was worth $120,000. In 1992, it is worth $110,000. Should Alice exercise the option and pay $100,000 for the land?
A) Yes
B) No
C) It depends on what the rate of inflation was between 1985 and 1992.
D) It depends on what the rate of interest was.

Question

Quizplus · Accepted Answer

Alice should exercise the option because the land's current value ($110,000) is higher than the price she would pay to exercise the option ($100,000), resulting in an immediate gain in value.

In 1985, Alice Paid $20,000 for an Option to Purchase