Information: Piece of land selling for $1,935,000. 225 acres total, $12,178 property taxes.

1. The ad offers 255 acres of agricultural land in Rice County for $1,935,000. If the value of land grows at 3% a year, how much will this land be worth in ten years?

2. If you knew you could sell this land for $2,500,000 in 5 years, and your discount rate was 5%, would you buy the land as offered? What is the maximum price you would be willing to pay for the land?

3. You contact the land owner and offer to pay $1,000,000 immediately and the rest in 1 year. If his discount rate is 5%, how much would you have to pay in 1 year for him to accept the offer?

4. Cash rents in Minnesota averaged $170/acre in 2016. That means that, on average, crop farmers who do not own land could lease the land for $170/acre to grow crops for 1 year. If you buy this land you will be able to lease it to agricultural producers in the area and earn infinite stream of annual payments of $170/acre. If the discount rate is 5%, what is the price of the property that would equal present value of the infinite stream of future cash rents?

5. Assuming cash rents of $170/acre and discount rate of 5%, what is the present value of cash rents you would earn over the next 10 years?

6. Given your answer for question 5, what would you have to believe market value of this land to be in 10 years in order to consider the asking price of $1,935,000 to be a good deal you should take?

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(1) Value after 10 years ($) = 1,935,000 x (1.03)¹⁰ = 1,935,000 x 1.3439 = 2,600,446.5

(2)

Present value (PV) ($) = 2,500,000 / (1.05)⁵ = 2,500,000 / 1.2763 = 1,958,787

Since PV of future selling price is higher than current purchase price, I would buy the land.

Maximum price I will offer is the PF of future selling price, i.e. $1,958,787.

(3)

Required payment after 1 year ($) = (1,935,000 - 1,000,000) x 1.05 = 935,000 x 1.05 = 981,750

************Please help me out on # 5 and 6