What is the value of a piece of land? Consider the following scenarios.
(a) Suppose that you own a farm run by tenants. You can keep it and earn $100,000 per year. How much is that worth to you in present value, if the interest rate is 4 percent? Note: you'll need to decide how long a time to use in the present value calculation. Why have you decided on that time?
(b) Someone proposes to buy the farm from you for $1 million. Would you make more by selling the farm or keeping it? Why?
(c) At what price would you be indifferent between selling the farm and continuing to get the earnings from it?
(d) If $100,000 per year is the maximum that the farm is likely to produce, what is the maximum price that a purchaser is likely to offer? Why?
(e) Is the maximum price that a purchaser might offer greater than, equal to, or less than the amount at which you would be willing to sell? Explain.
(f) Suppose that your personal rate of time preference is higher than 4 percent. Would you be more or less likely to sell? Why?
(g) A developer proposes to turn the farm into a subdivision. Why might the developer be willing to pay a higher price than the previous offerers?