Mark is considering the purchase of a lot. He can buy the lot today and expects the price to rise to $15,000 at the end of 10 years. He believes that he should earn an investment yield of 10% annually on this investment. The asking price for the lot if $7,000. Should he buy it? What is the annual yield (internal rate of return) of the investment if Mark purchases the property for $7,000 and is able to sell it 10 years later for $15,000?

Solution:

Because the present value of this investment is less than the $7,000 asking price for the lot, John should not buy it.

Time Value of Money

The calculation for internal rate of return is shown below.

Time Value of Money

 

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