Evaluating Transactions Misty Valley Estates is a real estate development company established nearly forty years ago when several thousand acres of land in California were purchased. Despite attempts to develop a wine-growing area, a commercial development park, a ski run, and several different residential areas, land sales have been slow. The owners of Misty Valley are relatively wealthy and are not under pressure to complete the development quickly. However, the owners would like to borrow money for other purposes and pledge some of the residential lots as collateral. A local banker has agreed to lend them 80 percent of the market value of the lots. The banker is aware of the following:

* The average cost of a lot at the time the land was purchased was $4,000.

* Four lots were sold two years ago for $16,000 each.

* Ten lots recently were purchased by a construction company at a price of $25,000 per lot. The company will start building as soon as houses are presold on the lots.

* Two lots were sold to the owner’s son-in-law for potential future development purposes at $10,000 each.

* One lot recently was sold for $42,000 cash. Because the purchaser is considering moving to another state, he can request a refund if he does not start building a house on the lot by the end of the current year.
* °A builder recently purchased for a total of $5,000 an option granting the right to buy 5 lots for $35,000 each. If the option is not exercised by the end of next year, it will expire and the $5,000 will not be refunded. If the option is exercised, the $5,000 will apply toward the total purchase price.
* A builder has reserved six lots on which to build custom homes. Although the builder has not purchased any of the lots, he has the right to purchase them at the average price paid for the last five comparable lots sold. The builder is delaying purchasing any lots until orders are received for homes.
The banker is aware of the importance of exchange transactions in valuing assets.

a. Which of the above activities qualify as exchange transactions? Explain your answer.

b. What market value do you think the banker should place on the lots? Why?