A landowner and a developer have agreed on a contract that would give the developer an option to purchase a property at a pre-determined price anytime over the length of the contract. The developer is committed to pay the landowner $25,000 at the beginning of every three months throughout the term of this contract. The present value of the contract, calculated with a rate of 13% compounded semiannually is $319,000. For how many years does the developer have an option to purchase this property?

Question

Quizplus · Accepted Answer

The present value of an annuity formula is used to calculate the number of years. Given the quarterly payment, the interest rate per period is adjusted to reflect quarterly compounding. Solving for the number of periods gives 16 quarters, which corresponds to 4 years.

A Landowner and a Developer Have Agreed on a Contract