6. Last year you heard a rumor that Seaside Heights, NJ was going to open a muse

Question

6. Last year you heard a rumor that Seaside Heights, NJ was going to open a museum in honor of the cast of The Jersey Shore. Hoping to cash in on the development, you bought a piece of land that was near the proposed site. The land cost $110,000, but the seller offered to finance 70% of the sale via an interest free loan for two years if you paid the rest in cash (you accepted this offer). Today Snookie and Governor Christie formally announced plans for the “GTL Museum,” with construction to take place next year. Based on this news, someone just offered to buy your land for $190,000 to build a parking lot near the new attraction. If you accept this offer, what will be your holding period return on this investment?  

Explanation / Answer

Land cost = $110,000

upfront payment = 30% of land cost = $110,000 * 30% = $33,000

loan = 70% of land cost = $110,000 * 70% = $77,000

HPR = (End value - Initial value)/ (initial value)

HPR = (190,000 - 110,000)/ (110,000) = 72%

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