Question
A acre of land sells for $2500/acre. The current annual income per acre is $150/acre and the income is expected to maintain its current purchasing
A acre of land sells for $2500/acre. The current annual income per acre is $150/acre and the income is expected to maintain its current purchasing power in the future. Assume that annual nominal interest rates are = 0.1024 and expected annual inflation is = 0.06. Use an excel simulation to demonstrate that the land will eventually cash flow if an investor purchased the land for $2500/acre, and financed the purchase by borrowing the full $2500/acre while being charged the nominal rate each year on the outstanding debt balance. For any years in which the land's nominal income is less than the nominally accrued interest, the "cash flow shortfall" is added onto the outstanding debt balance. a. In what year does the land start to have enough income to "cash flow" i.e. cover it's annual accrued nominal interest? b. In what year would the land's cash flow finally pay off the debt?
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