borrow the money from Gringotts Wizarding Bank to finance the

land at a $4\mathrm{.}7\%$ annual interest rate. Hagrid expects inflation to be

$1\mathrm{.}9\%($the economy is looking up after the departure of he$-$who$-$must$-$

not$-$be$-$named$).$

Please round to FOUR decimal places throughout, with the exception of dollars or cents and

percentages which may be rounded to only $2$ decimal places.

A$)$ Estimate the average annual ownership cost per acre $($do not multiply and divide by the number of

acres in the tract$)$ for that expansion. $($Hint: For an input with unlimited life there is no depreciation,

and the interest is just the value times the real interest rate.$)$ Land maintenance, including tile repair,

will be about $$3\mathrm{.}75$ per acre annually, taxes are $$29$ per acre, and liability insurance is $$0\mathrm{.}95$ per acre

$($Fairly low considering the deadly Mandrake cry!!!$).$

B$)$ What will the average annual cash outlay be per acre on this field?

NOTE: The difference between ownership cost and cash outlay is that the cash outlay is greater by the

principal payment, and you must pay the nominal interest rate to your lender, not the real rate. $($Recall

our discussion of calculating loan payments in class.$)$

$*$To find the equal annual principal and interest payments $($loan payment due$),$ use the amortization factor

and multiply it by the amount financed. Use an $18-$year loan length as life and the nominal interest rate

in place of the real rate of interest.

C$)$ Assume the cash rent on this land would be $$270$ per acre. Find the percent of the competitive cash

rent that the ownership cost $($from part A$)$ and cash outlay $($from part B$)$ is for an acre of this land.

Simply carry over your ownership cost and cash outlay from above.

Percent of cash rent

Cash Rent

$$270$

$100\%$

AAOC

A

B

Cash Outlay

$-C$

$D$

D$)$ What annual rate of return will Hagrid earn on this land investment if he buys it at its market price and

cash rents it at the market to his neighbor? The annual return or net rent is the cash rent less

maintenance, taxes, and insurance. The rate is the annual return divided by the purchase price.