4. The parents of a friend need your advice. They currently own a piece of prope

Question

4. The parents of a friend need your advice. They currently own a piece of property in northern Wisconsin. They bought it for $125,000 10 years ago in the hopes of using it to pay for their son’s college. They just received an offer to sell it to a developer for $200,000. If they accept, they would invest the proceeds for the four years until their son starts school and earn an interest rate of 3% quarterly. They believe the land could sell the land for $325,000 four years. Would you advise them to sell the land now or then? Why?

Explanation / Answer

Value to be received today = $200,000

If they invest above they can 3% quarterly rate for next 4 years.

Future value of the value today = Value today x (1+Rate)^(Years x Quarters)

Future value of the value today = $200,000 x (1+3%)^(4 x 4)

Future value of the value today = $320,941.29

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As future value for value invested today would be $320,941.29 and expected selling price of property would be $325,000 i.e. more than the calculate future value i.e. $320,941.29.

Hence, advise not to sell the property today. Sell after 4 years for $325,000.

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