An investor is considering the purchase of 20 acres of land.An analysis indicates that if the land is used for cattle grazing,it will produce a cash flow of $1,000 per year indefinitely.If the investor requires a return of 10 percent on investments of this type,what is the most he or she should be willing to pay for the land?
A) $1,000
B) $10,000
C) $100,000
D) $150,000
E) $1,000,000

Question

Quizplus · Accepted Answer

The most the investor should be willing to pay for the land is the present value of the perpetuity, which is calculated as cash flow divided by the discount rate. In this case, the present value can be calculated as $1,000 / 0.10, which equals $10,000. Therefore, the investor should not pay more than $10,000 for the land.

An Investor Is Considering the Purchase of 20 Acres of Land.An