Problem #1

Examine the sensitivity of the net present value of land with a real cash rent of $207 and capitalization rates of 2.5%, 3.0%, and 3.5%. What would be the rationale for using multiple capitalization rates?

Problem #2

Using your answer for the 3% discount rate in the first problem, compute the principal and interest payment for the first 5 years of a 20-year land note. Assume a down payment of 30%. Your business is financed with 25% debt and 75% equity. Cost of debt and equity are 6% and 8%, respectively. Your marginal tax rate is 25%. Compare the principal and interest payments to a cash rent of $207.