You are the judge in a settlement case. You need to compute the value of a piece

Question

You are the judge in a settlement case. You need to compute the value of a piece of land in Denver Co. The valuation is subject to the following conditions:

*The settlement will take place at the end of 2019

*The current appraised value of the land on 1/1/2018 is $500.000

*The piece of land has a building on it that is uninhabitable . It takes one year to bring the building down at a cost of $100,000. That money must be paid now.

*The land can be rented in 2019 at a net proceeds of 40,000

*While rented the land cost $20,000 in property taxes

*Your real estate adviser notes that selling prices of comparable lands in Denver have declined, in real terms, at an average rate of 3% per year over the last 5 years.

*The cost of capital is 10%

*The sale of the land at the end of 2019 is subject to a 10 % commission.

What should someone pay today for this land if given the choice?

Explanation / Answer

Price of land at end of 2019 = 500000*97%*97% = 470450

Price after commission= 470450*90%= 423405

PV of the price of land = 423405/1.1^2 = 349921.49

Cost of bringing down the building= -100000

PV of rent received in 2019 = (40000-20000)/1.1^2 = 16528.93

Hence Price that should be paid for the land= 349921.49-100000+16528.93

= $266450.42

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