All land within the municipality of Springfield is zoned for either agricultural

Question

All land within the municipality of Springfield is zoned for either agricultural, residential or commercial use. You have just purchased a parcel of agricultural land for $20,000 in the expectation that it will be rezoned next year. But the rezoning is controversial, and will be decided by the full City Council rather than just the Zoning Commission. According to your inside sources, there’s a 30% chance the land will be rezoned for commercial use; in that event, you’ll be able to sell the land for $50,000. But the populists on the Council are pushing for more affordable housing; if they win the vote, which your sources think has a likelihood of 50%, then the land will be rezoned for residential use, and you’ll only be able to sell it for $30,000. Of course, the Greens may win, and the land won’t be rezoned at all. In that event, it will still be worth what you paid for it, but no more than that. You’ve just been approached by Mr. Hi Roller. He’s a land speculator like yourself, but he doesn’t have your inside sources. He thinks the land will be rezoned next year, and has offered you $30,000 cash for it, right now. Which alternative should you choose? Explain your decision process in detail.

Explanation / Answer

If i have to take decision, then i would hold the property, not going to sale as early. As the risk reward ration is very much favourable. There are two possibilities to be considered:

1. If I sell immediately then i will get a return of 50% cash on my investment. ($30,000 received by investing $20,000)

2. If I hold it for next year, there are 30% percent chances that i would get 150% return on my investment. (Sell around on $50,000 by investing $20,000).

Second case, if the property rezoned for residential use which have 50% chances, then i would get return of 50% after one year on my investment.

If it sell immediately, then I get 50% return on investment presently but if i hold, then return would be less only to the interest for the one year on initial investment.

Risk would be minimum, but the return would be far beyond the return on cash deal.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.