Suppose you know a piece of land will be worth $1 million (real)in 2040,and the real interest rate is 5%.How much should you be willing to pay for the land today (2010)? (Assume no taxes).

Question

Quizplus · Accepted Answer

To find out how much we should be willing to pay for the land in 2010, we need to discount the future value of the land back to the present time, using the real interest rate. 
PV = FV / (1 + r)^n
PV = 1,000,000 / (1 + 0.05)^30
PV = $230,070.55
Therefore, we should be willing to pay $230,070.55 for the land in 2010 if we expect it to be worth $1 million in 2040. Thus, the best choice is (D).

Suppose You Know a Piece of Land Will Be Worth